ACCOUNTING ASSUMPTIONS, CONCEPTS

AND CONVENTIONS
1. ENTITY CONCEPT

Economic entity (the business) is separate entity from other

organizations or individuals (their owner / shareholder)
The owner private activities / properties should not be mix up
with the business activities / properties (this is to avoid confusion
and ease evaluating the business performance separately from
personal matter

2. GOING CONCERN CONCEPT

Under this concept, the accounting records are prepared and

recorded with the assumption that there is no signs of a business
entity will cease (stop) their operation. And the business will
operate in the foreseeable future.

3. HISTORICAL COST CONCEPT

Assets acquired / purchased must be recorded in the account

based on the original purchase price. (do not record based on the
current market value)

4. PERIODICITY CONCEPT

For accounting purposes, every businesses needs to have their

own accounting period (accounting year ended)
Accounting year ended is not necessary the same with calendar
year ended e.g. 31st July, 2009.
There are 12 months in each accounting year.

5. MONETARY CONCEPT

Acc 106/ SJ

In accounting, the unit of measure commonly used is the

currency. No other measure can be used for accounting record
except for common currency
For example, an officer which does not perform or late for his
work cannot be taken into accounting record as it cannot be
measure in term of currency.
A business transaction, such as a purchase of fax machine for
RM500 can be taken into accounts record.

6. CONSISTENCY CONCEPT

It is base on this concept, it requires a business to maintain the

same method which have been practice before to be in line with
this consistency concept
For example, if straight line method had been utilized for
depreciation, in the fore coming year the same method should be
adopted.

7. MATERIALITY CONCEPT

It is generally items which are of insignificant value do not make

an impact in making a decision unlike those which are significant
in value
For example, an expense at year end which had not been taken
up amounting to RM1000 to a small business is more material as
compare to a multimillion company.

8. ACCRUAL

Accrual concept states that all expenses and charges need to be

taken into account accordingly to when it incurred, regardless
with or without payment or receipt is made.

9. DOUBLE ENTRY CONCEPT @ DUALITY

Acc 106/ SJ

The duality concept says that there are two aspects of

accounting. One represented by the assets of the business and
the other by the claims against them.
According to this concept, these two aspects are always equal to
each other. That is:
ASSETS = LIABILITIES + OWNERS EQUITY

The method of recording the transactions for the dual concept is

called the double entry.
This concept explains that every transaction will involve two
entries, that is a Debit and Credit entry.

10. OBJECTIVITY CONCEPT

This concept requires that the accounting records and reports be

based upon objective evidence.
In transactions between a buyer and seller, both try to get the
best price. Only the final agreed upon amount is objective
enough for accounting purposes; and for this evidence such as
receipts and invoices will be used.

11. NEUTRALITY

As information in the accounting records is being used for

decision making, therefore it must free of bias.
Such information is presented as it is without being tampered for
the sake of management.

Acc 106/ SJ