Accounting concepts and assumptions

စာရင္းကိုင္ အယူအဆမ ား

U Thant Zaw Oo @ KMD Institute 1

Going concern concept

 The going concern assumes that the business will

continue to trade for the foreseeable future.

E.g. Non-current assets are shown on the statement

of financial position at carrying amount not resale
value.
Accrual concept

 The effects of transactions and other events are

recognized when they occur and they are recorded
in the books and reported in the financial
statements of the period to which they relate.

Net profit is the difference between revenues and the

expenses incurred in generating those revenues i.e.
Revenue – Expenses = Profit
The Matching Principle is part of the accrual basis of
accounting and ensure that expenses are matched to revenues
recognized in an accounting period.
 Statement of profit or loss
$ $
Revenue (120 ခို x $10) 1200
- Cost of Sale
O/inventory (20 ခို x $6) 120
Purchases (140 ခို x $6) +840
960
- C/inventory (40 ခို x $6) (240) (720)
Gross Profit 480
ရရောင်းရရငွေ (Revenue) သည ကုနအရရအတွေက ၁၂၀ စောဖြစ၍
ရရောင်းလကု ရသောကုန၏ ကုနကျစရတ (Cost of sale) သညလည်း ကုနအရရအတွေက ၁၂၀ စော
ကုနကျစရတသော ဖြစရမည။ (Matching concept)

ထရု ို့ ကောင ို့ (နှစစကုန ၂၀ တွေင ထပဝယရသောကုန ၁၄၀) စုစုရပေါင်း ၁၆၀ ရှရသောရ ကောင ို့
မရရောင်းပဲ ကျနရနရသောကုန (Closing inventory) ၄၀ ကု နုတရဖြင်းဖြစသည။
Realization concept

 Realization concept in accounting, also known as

revenue recognition principle, refers to the
application of accruals concept towards the
recognition of revenue (income).

E.g. Revenue is recognised on raising a sales invoice.

Prudence concept

 Applying the prudence concept means that we are

applying caution to some of the figures used in the
financial statements.

E.g. Closing inventory, Bad debt to be written off,

Allowance for doubtful debt
Prudence concept
 Financial Statements မျော်းတွေင အသ်းု ဖပြုရသော ကန်းဂဏန်းမျော်းကု
သတထော်းရြောဖပရပ်းရမယ။

*Assets နဲ Iို့ ncome သည never Overstated ပပု ပ်းရြောဖပလမရ

ု ို့
*Expenses နဲ ို့Liabilities သည never Understated ရလျောပို့ ပ်း
ရြောဖပလမရ
ု ို့
ဥပမော
Closing inventory တန်းြ်းု တွေကတဲအ
ို့ ြေါမှော Cost price နဲ N
ို့ RV
ဲ အနည်းဆ်းု ရ ်း (Lower price) နဲတွေ
၂ြုထက ို့ ကရပ်းရမယ။

Closing Inventory

Quantity (Units) x Price = Amount

Purchase price Selling price

(Cost Price) (Net Realizable Value)

Lower price
 ဥပမော
Bad debt to be written off, Allowance for doubtful debt
တပေါရင
ု ို့ Trade receivable ထဲကရန နုတ၍ရြောဖပရပ်းရမယ။

Glynis
Statement of financial position at 31 December 2018
$ $ $
Current Asset

Trade receivable xxx

-Bad debt to be written off (xxx)
- Allowance for doubtful debt (xxx) xxx
Consistency concept

 When compiling financial statements it is important

that we are consistent with the methods used.

E.g. He must continue to use the same method of

depreciation in the future.
Business entity concept

 The business entity concept implies that the affairs

of a business to treated as being quite separate
from the non-business activities of its owner(s).

E.g. Owners’ drawings would not be shown on the

income statement.
Materiality concept

 Purchase of small value items should not be

considered as non-current assets but should be
written off in the year they are incurred.

E.g. The owner will have low value items that he/she
may chose not to capitalize.
Dual aspect concept

 This states that there are two aspects of

accounting, one represented by the assets of the
business and the other by the claims against them.

Assets = Capital + Liabilities

Practices for accounting concept

U Thant Zaw Oo @ KMD Institute 38

Which concept must Charlotte comply with?

 1. Charlotte charges the cost of a recent family holiday

as a business expense.
Business entity

 2. Charlotte decides to change the method of

depreciation charged in order to improve her profits.
Consistency

 3. Charlotte records the purchase of a box of staples as a

non-current asset.
Materiality
Which concept are these statements?

 The purchase of a calculator costing $10 was treated as

an expense.
 A builder records the purchase of a new screwdriver for
$10 as revenue not capital expenditure.
 In a manufacturing company, the tools are treaded as
revenue expenditure.
Materiality

 The purchase of a private motor vehicle was not recorded

in the books.
 Sasha should not withdraw money from the business for
private use.
Business entity
 A business uses the same method and rate for
providing depreciation on all non-current assets.
 The method of depreciation of non-current assets
was unchanged.
Consistency

 Christ counts for the inventory value at Lower of the

cost and net realizable value.
 A business writes off customer debts that are
irrecoverable.
 Louis makes an allowance for doubtful debt for this
accounting period.
Prudence
 Jack started business since 2017. He decides that he
will continue to trade for the next 10 years.
Going concern

 Revenue is recognised on raising a sales invoice.

Realisation

 The business paid $ 2000 for rent in the year. At the end
of the period, the bill $ 500 for rent which relates to this
year was received.
Accrual concept

 Assets = Equity + Liabilities

Dual aspect concept
 AO1 Memorise
(Recall accounting facts, terms, definitions, processes and
formulae.)

1. Explain why it is important to make adjustments in the

financial statements in relation to accruals and prepayments.

In the financial statements, it is important to show income and

expenditure (expenses) that only relates to the financial year you
are preparing.

This will ensure the accounts show a true and fair view, it will
also ensure profit for the year is not overstated or understated.
 AO1 Memorise
(Recall accounting facts, terms, definitions, processes and
formulae.)

2. Explain the importance of accounting for the accrual of

expenses.
The accruals/matching concept states that income should
be matched with the appropriate revenue in the accounting
period it relates to.

If expenditure is not accounted in the correct financial

period it will overstate profit and not show a true and fair view in
the accounting records.
 AO1 Memorise
(Recall accounting facts, terms, definitions, processes and
formulae.)

3. Explain two accounting concepts that would be affected if a

manufacturing business decided not to depreciate its plant and
machinery.
The accrual concept means that expenses and revenue
are recorded and matched in the period they occur. Failure to
record depreciation will lead to an overstatement of profit and an
overstatement of non- current assets.
The consistency concept states that businesses should
use the same accounting treatment for similar events and
transactions over time. Failure to depreciate the non-current
assets will affect comparability of financial statements.
Identify the accounting concept Tatek is applying in
maintaining an allowance for doubtful debts.

 A Prudence
 B Going concern
 C Materiality
 D Realisation
Sandy always uses the reducing balance method of
depreciation for motor vehicles.
Identify which accounting concept is being applied.

 A Accruals
 B Consistency
 C Going concern
 D Prudence
Frazier purchased tools for $35. The purchase was treated as a
non-current asset in the financial statements.
Identify the accounting concept Frazier has not complied with.

 A Accruals
 B Materiality
 C Going concern
 D Consistency
Frazier withdraws cash for his own use from the business.
Identify the accounting concept Frazier must comply with.

 A Accruals
 B Business entity
 C Realisation
 D Prudence
Subscriptions for life memberships are transferred to the
income and expenditure account over a period of 25 years.
Identify which accounting concept is being applied.

 A Accruals
 B Going concern
 C Realisation
 D Prudence
Identify which one of the following concepts assumes that the
business will continue for the foreseeable future.

 A Accruals
 B Business entity
 C Consistency
 D Going concern