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Basic Accounting Concepts

With Definitions and

Real-Life Examples

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Going Concern

  • Assumes the business will continue to operate in the foreseeable future.

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  • Example: Depreciating a building over 20 years because the business isn't expected to close soon.
  • Application:�If there are signs the company may shut down (e.g., heavy losses, lawsuits), this assumption must be questioned and disclosed.

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Duality Concept (Double Entry)

  • Every transaction affects at least two accounts to maintain balance.
  • Example: Borrowing RM10,000 increases both Cash (Asset) and Bank Loan (Liability).
  • Application: All accounting records must reflect this dual effect.

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Prudence (Conservatism)

  • Recognize expenses and liabilities as soon as possible, but revenues only when they are assured.
  • Example: Record RM5,000 legal loss as expense before court decision.
  • Application:�Revenue is only recognized when it is certain, but expenses and losses are recognized as soon as they are probable.

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Entity Concept

  • Business is treated as separate from its owner(s).
  • Example: Owner’s personal car purchase is not recorded unless for business use.
  • Application: Avoids mixing personal and business finances, ensuring clarity in financial reports.

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Accruals Concept

  • Transactions are recorded when they occur, not when cash is received or paid..
  • Example: December rent paid in January is still a December expense.
  • Application: Gives a more accurate picture of profitability in each period.

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Consistency

  • Use the same accounting methods from period to period.
  • Example: Use the same depreciation method unless justified.
  • Application: Improves comparability of financial performance over time.

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Historical Cost

  • Assets are recorded at original cost, not market value.
  • Example: A RM500,000 building bought in 2000 stays at that value in records.
  • Application: Provides objectivity but may not reflect current economic value.

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Materiality

  • Only significant items are recorded and reported separately.
  • Example: RM75,000 machinery recorded separately, RM75 paper purchase is not.
  • Application: Helps avoid clutter in financial reports; focus is on what's important.

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Money Measurement

  • Only transactions measurable in money are recorded.
  • Example: Customer satisfaction is not recorded.

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Matching Concept

  • Match expenses to the revenues they help generate.
  • Example: Record cost of inventory sold in June as June expense. If RM50,000 worth of inventory is sold in June, the cost of that inventory is recorded as June expense, even if it was purchased in April.
  • Application: Ensures accurate measurement of profit or loss for a given period.