Basic Accounting Concepts and Principles

1. All reports and financial statements presented must be based on accepted principles and standards of public acceptance and recognition.
2. The accounting principle is based on the following concepts.

Separate Entity
1. Business is a separate entity or entity from the business owner.
2. This concept is complied with by all forms of business organization regardless of the sole proprietorship, partnership, or limited company.
3. Any dealings between a business and its owner are regarded as an affair between two separate parties.
4. Only business-related transactions are recorded in the business book. For example, the owner bought a living room furniture with his personal money.
5. The capital invested by the owner into his business is considered as the owner’s loan to his business. Therefore, the owner is considered a creditor to the business.

Money As Measurement
1. Transaction is the activity of buying and selling merchandise or services.
2. Each transaction must be recorded in the form of money.
3. Money is a unit of measurement and intermediate exchange in all business transactions.
4. The limitation of this concept is that only the factors that can be measured with money can only be recorded. Objectives that can not be measured objectively as honesty and employee experience can not be recorded.

History Cost
1. The historical cost concept means an asset purchase transaction is recorded based on the cost of the purchase at the date of purchase although the market value or the present value of the asset has changed.
2. This concept is used to record the value of the assets shown in the Balance Sheet.
3. For example, a vehicle bought for RM32,000. A year later, the value of the vehicle dropped to RM29,000. Under the historical cost concept, the business will still show the vehicle at RM32,000 in its record, which is the cost (vehicle purchase price) of the vehicle.
4. This concept is also applied when recording the owner’s liability and equity value. The purpose of this concept is to make records and financial reports more objective.

Persistent Body
1. An assumed business will continue to operate for a prolonged period and its assets will continue to be used to generate income for the business.
2. Businesses do not have to report assets at their liquidation value because businesses are not expected to be dissolved in the short term
3. Business is considered to have a continuous life.

Accounting Period
1. The life of a business is ongoing. It is therefore necessary to divide the life of the business into the same and constant accounting period. For example a year, a half year, a quarter, and so on.
2. In this way, the outcome of a business operation may be known at the end of each accounting period. In addition, comparisons can be made between two accounting periods to evaluate their business performance.
3. The accounting period of a business depends on the size and nature of the business.
4. The diagram below shows the life of a business that is divided into a fixed accounting period.
5. To seek profit or loss for a period, only transactions affecting the profit or loss of the business for that period are taken into account.

Matching Concepts
1. This concept states that to calculate net profits from the accounting period, the amount of revenue within that period must be matched with expenses over the same period.
2. Expenses are the cost of handling a business eg purchases of merchandise, payroll, rental, insurance, etc.
3. Business revenue comprises proceeds from sales of merchandise or services, rental receipts, commissions, discounts, and so on.
4. This concept is also known as an accrual concept.

Double entry system

1. The double entry system is a system of recording each transaction in two separate accounts on the opposite side, an account is debited while another account is credited with the same amount, namely:
a. When one party enters, there must be other party to receive
b. When an amount is given, there must be an equal amount of money received.
Thus, the principle of double-entry system is:
a. Debit account receives an amount
b. Credit amount that gives something amount.
The amount of debit records is always the same as the total credit record at all times.
2. Accounting equation can always be maintained if the in system is practiced carefully.
3. This system can determine the accuracy of the recording process by providing a Balance Sheet from time to time.