Table of Content

NO TOPIC PAGE NUMBER

1 Table of Content 1

2 Introduction 2

3 Accounting Concept 3-13

4 Stakeholder 14

5 Importance of Accounting To 15
Internal Stakeholder

6 Importance of Accounting To 16-17

External Stakeholder

7 Relate Concept of Accounting to 18

Decision Making

8 Conclusion 19

9 References 20

1
Introduction
The purpose of accounting is to provide a means of recording, reporting, summarizing, and
interpreting economic data. In order to do this, an accounting system must be designed. A
system design serves the needs of users of accounting information. Once a system has been
designed, reports can be issued and decisions based upon these reports are made for various
departments. Since accounting is used by everyone in one form or another, a good
understanding of accounting principles is beneficial to all. Accounting is a wonderful but
confusing discipline. The widely view is its typically mind-numbing number-crunching; the
idea certainly has a few of them, but additionally it is also a rich intellectual pursuit with a
good amount of convincing along with suspect troubles. Accountants will often be
stereotyped since soulless drones labouring listlessly inside bowels of corporate
bureaucracies. But quite a few accountants will certainly show you its people skills, not
technological information, which might be crucial to their achievements. In addition to
despite the fact that it has been looked at as some sort of self-discipline of identify exactitude
together with rigorous principles, used accountants depend heavily in finest rates along with
informed guesses that want cautious wisdom along with strong creativeness.

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ACCOUNTING CONCEPTS

DEFINITION:

Accounting concepts define the assumptions on basis of which financial

statements of a business entity are prepared
Concepts are those basic assumptions and condition, which form the
basis upon which the accountancy has been laid
Following are the various accounting concepts
a) GOING CONCERN CONCEPT
b) ACCRUAL BASIS
c) MONEYTARY UNIT
d) MATERIALITY
e) DOUBLE ENTRY
f) SEPARATE ENTITY
g) HISTORICAL COST
h) CONSISTENCY OF PRESENTATION
i) MATCHING CONCEPTS
j) ACCOUNTING PERIOD

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 ACCOUNTING CONCEPTS

GOING CONCERN CONCEPT

The going concern concept of accounting implies that the business entity will
continue its operations in the future and will not liquidate or be forced to
discontinue operations due to any reason. A company is a going concern if no
evidence is available to believe that it will or will have to cease its operations in
foreseeable future.

EXAMPLE
(1). A company manufactures a chemical known as Chemical-X. Suddenly, the government
imposes a restriction on the manufacture, import, export, marketing and sale of this
chemical in the country. If Chemical-X is the only product that company manufactures, the
company will no longer be a going concern.

(2).The Eastern company closes one of its branch and will continue with others. The
company is a going concern because the shutting down a small part of business does not
impair the ability of the company to operate as going concern.

(3).The Small company is unable to make payments to its creditors due to a very weak
liquidity position. The court grants the order of liquidating the company upon the request of
one of the companys creditors. The company is no longer a going concern because sufficient
evidence is available to believe that the company cannot continue its operations in future.

(4).In 2011, Gibson Guitar Factory was raided by the Federal government for illegally
smuggling endangered wood into the country. The Federal government took more than
$250,000 worth or Gibson's inventory and slapped them with large fines for violating
international laws. Gibson is still considered a going concern, because it is not likely the fines
and punishment will stop its operations.

++ (Liquidate is an event that cannot pay its obligations as and when they come due.
The company's operations are brought to an end, and its assets are divvied up among
creditors and shareholders.)++

4
 ACCRUAL BASIS

The accrual basis of accounting is the concept of recording revenues when earned and
expenses as incurred. Accrual basis accounting is the standard approach to recording
transactions for all larger businesses. A company operating under the accrual basis of
accounting will record a sale as soon as it issues an invoice to a customer and record an
expense as incurred Expenses consist of the assets used up in a particular period in obtaining
the revenue of the period, and that cash paid in a period and expenses of a period. Accruals
basis of accounting ensures that expenses are "matched" with the revenue earned in an
accounting period. Accruals concept is therefore very similar to the matching principle.

EXAMPLE
1)An Event sells its tickets days or even weeks before the event is happen, but it does not
record the receipts as revenue because the event, the on which the revenue is based has not
occurred yet. The Event journalizes receipt of cash as follows:

Bank ABC
Unearned revenue AB
C

Unearned revenue is a current liability which extinguishes when the Event is happen.
Unearned revenue ABC

Revenue ABC

(2). A business records its utility bills as soon as it receives them and not when they are paid,
because the service has already been used. The company ignores the date when the payment
will be made.

(3). Record and report revenue at the time it is earned and realized by the business, not when
the cash for the revenue is received by the business.

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MONEYTARY UNIT

Monetary Unit Assumption. The monetary unit concept is an accounting principle that
assumes business transactions or events can be measured and expressed in terms of monetary
units and the monetary units are stable and dependable. In other words, the language of
business and finance is money. One aspect of the monetary unit assumption is that currencies
lose their purchasing power over time due to inflation, but in accounting we assume that the
currency units are stable in value. This is alternatively called stable dollar assumption.

Examples
(1).The company' Stationary on 2015 balance sheet amounted to RM500 Thousand. During
2010 inflation was 10%. The monetary unit and stable Ringgit assumption prohibits any
adjustment to current or prior period figures to account for the inflation (runtuh).

(2).The CEO of Fine Enterprise delivers a lecture to the employees in a special meeting that can be
helpful in raising the employees morale and completing the current projects on time.
As the value of the lecture cannot be measured in terms of money, it cannot be recorded in the books
of accounts of Fine Enterprise.

The Metro company purchased a tract of land for RM25,000 in 2005.

(3).
Because of inflation, the worth of the tract of land is now RM40,000. The Metro Company
cannot adjust its balance sheet because the monetary unit assumption enforces it to ignore the
impact of inflation.

6
MATERIALITY

Materiality is the threshold above which missing or incorrect information in financial

statements is considered to have an impact on the decision making of users. Materiality is
sometimes construed in terms of net impact on reported profits, or the percentage or dollar
change in a specific line item in the financial statements

Example
1)A company reports a profit of exactly RM10,000, which is the point at which earnings per
share exactly meet analyst expectations. Any profit below this point would have triggered a
selloff of company shares, and so would be considered material.

2)The accounting policies are material and cant be omitted because they help the users
understand how the management arrived at the amounts presented in the financial statements.

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DOUBLE ENTRY
Double entry is the fundamental concept underlying present-day bookkeeping and
accounting. Double-entry accounting is based on the fact that every financial transaction has
equal and opposite effects in at least two different accounts. It is used to satisfy the equation
Assets = Liabilities + Equity, in which each entry is recorded to maintain the relationship.

EXAMPLE
Here are five examples to help drive the point.

1. Buying a piece of machinery with cash. As above, assets are entered in the debit
column when theyre increased and the debit column when theyre decreased. So
youll have a balance as shown below.

Account Debit Credit

Machinery (Asset) RM5,000
Cash (Asset) RM5,000

2. Heres how paying an employee could look the details will depend on your chart of
accounts. Youre increasing your expenses with a debit entry and decreasing your cash
with a credit entry.

Account Debit Credit

Wages (Expense) RM2,200
Payroll Taxes (Expense) RM300
Cash (Asset) RM2,500

3. Writing down the value of inventory is a simple matter of dropping the value of your
Inventory account by entering a credit and matching it with a debit in Cost of Goods
Sold or a separate inventory write-off account.

Account Debit Credit

Cost of Goods Sold (Expense) RM4,500
Inventory (Asset) RM4,500

4. For the sale of stock to investors, you would generate cash and increase equity.

Account Debit Credit

Cash (Asset) RM50,000
Common Stock (Equity) RM50,000

5. Finally, if youre replaying a loan to the bank, youll decrease the cash you have on
hand while also decreasing the liability of the loan.

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Account Debit Credit
Loans Payable (Liability) RM2,500
Cash (Asset) RM2,500

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SEPARATE ENTITY

An accounting entity is a clearly defined economic unit that isolates the accounting of certain
transactions from other subdivisions or accounting entities. An accountant maintains separate
records for separate accounting entities and determines the specific cash flows from each
entity. Otherwise, there is a considerable risk that the transactions of the two will become
intermingled However, all accounting entities are often aggregated in the company-wide
financial statements The separate entity concept is useful for determining the true profitability
and financial position of a business. It should also be applied to the operating divisions of a
business, so that we can separately determine the same information for each division. The
concept is more difficult to apply at the division level, for there is a temptation to allocate
corporate expenses to each of the subsidiaries; this makes it more difficult to ascertain
profitability and financial position at the operating unit level. Once the policies and
procedures for the accounting for a separate entity have been stated, they should be followed
consistently; otherwise, there will continue to be a gray area in regard to transactions
belonging to the owners or the separate entity. The separate entity concept is also useful in
case there is a legal judgment against a business, since the owner does not want to have
personal assets intermingled with those of the business, and therefore subject to forfeiture.

EXAMPLE
1).An owner cannot remove funds from a business without recording it as either a loan,
compensation, or an equity distribution. Otherwise, the owner may buy something (such as
real estate) and leave it on the books of the business, when in fact the owner is treating it as a
personal possession.

2).An owner cannot extend funds to a business without recording it as either a loan or a stock
purchase. Otherwise, undocumented cash appears in the business.

3).An owner is the sole investor in a building, and arranges to have his business operate from
that building in exchange for a monthly rent payment. The business should report this
payment as an expense, and the owner should report it as taxable income.

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HISTORICAL COST

A historical cost is a measure of value used in accounting in which the price of an asset on the
balance sheet is based on its nominal or original cost when acquired by the company. The
historical-cost method is used for assets in the United States under generally accepted
accounting principles (GAAP). The need for this has already been described in the text book
valuation example. It means that assets are normally shown at cost price, and that this is the
basis for valuation of the assets.

EXAMPLE
1).Pam's Restaurant was formed in 1945. It purchased a building soon after in 1946 for
RM20,000. Total, some 50 plus years later, Pam's is still in business. The original building is
still on the balance sheet for RM20,000 even though the current fair market value of the
building is well over RM200,000. Pam's will keep the building on its balance sheet for
RM20,000 until it is either retired or sold.

2). Jeff's Construction, bought a piece of equipment in 2001 for RM10,000. Today this piece
of equipment is only worthRM2,000. Jeff would still report the equipment at its purchase
price of RM10,000, less depreciation, even though its current fair market value is only
RM2,000.

3).Bill's investment firm purchases several pieces of property in Brazil as an investment.

Over the last five years, the Brazilian currency has been in double-digit inflation and the
investment is not worth nearly what Bill paid for it. The historical cost principle does not
adjust asset values based on currency fluctuations, so the property would still be reported as
the original purchase price.

11
CONSISTENCY OF PRESENTATION
The concept of consistency means that accounting methods once adopted must be applied
consistently in future. Also same methods and techniques must be used for similar situations.
Consistency concept is important because of the need for comparability, that is, it enables
investors and other users of financial statements to easily and correctly compare the financial
statements of a company.

EXAMPLE
1) Company A has been using declining balance depreciation method for its IT equipment.
According to consistency concept it should continue to use declining balance depreciation
method in respect of its IT equipment in the following periods. If the company wants to
change it to another depreciation method, say for example the straight line method, it must
provide in its financial report, the reason(s) for the change,the nature of the change and the
effects of the change on items such as accumulated depreciation.

2.)Company B is a retailer dealing in shoes. It used first-in-first-out method of inventory

valuation in respect of shoes at Branch X and weighted average inventory valuation method
in respect of similar shoes at Branch Y. Here, the auditors must investigate whether there are
any valid reasons for the different treatment of similar inventory located at different
locations. If not, they must direct the company to use any one of the valuation method
uniformly for the whole class of inventory.

3).Companies should choose the most suitable accounting methods and treatments, and
consistently apply them in every period.

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Matching concepts
The matching concept is an accounting practice whereby firms recognize revenues and their
related expenses in the same accounting period. Firms report revenues, that is, along with the
expenses that brought them. The purpose of the matching concept is to
avoid misstating earnings for a period. Reporting revenues for a period without reporting all
the expenses that brought them could result in overstated profits. Note especially that
applying the matching concept requires accrual accounting, the practice of recognizing
revenues when they are earned and expenses when they are incurred. Actual cash flows from
these transactions may occur at other times, even in other periods.

Examples

1) Angle Machining, Inc. buys a new piece of equipment for RM100,000 in 2015. This
machine has a useful life of 10 years. This means that the machine will produce products for
at least 10 years into the future. According to the matching principle, the machine cost should
be matched with the revenues it creates. Thus, the machine is depreciated over its 10-year
useful life instead of being fully expensed in 2015.

2) Bajor Art Studio produces picture frames and sells them to wholesalers like Michaels and
Hobby Lobby. Bajor pays its employees RM20 an hour and sells every frame produced by its
employees. Since the payroll costs can be directly linked back to revenue generated in the
period, the payroll costs are expensed in the current period.

3) Big Appliance has sold kitchen appliances for 30 years in a small town. It purchases a
large appliance from wholesalers forRM5,000 and resells it to a local restaurant for RM8,000.
At the end of the period, Big Appliance should match the RM5,000 cost with the RM8,000
revenue.

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STAKEHOLDERS

Stakeholder is a person or entity that has interest in the financial performance and welfare of
a business entity. Stakeholders may include the owner, the employees, the debt holders and
shareholders of a firm. These stakeholders are the custodian of the business. For example,
owners and employees are the people that manage the day-to-day operation of a business,
while banks and debt holders provide financing for business to run and expand.

Internal Stakeholders External Stakeholders

Hierarchy (formal power) e.g. authority, senior Control of strategic resources e.g.
position materials, labour, money

Involvement in strategy
Influence (informal power) e.g. leadership style Implementation e.g. strategic partners in
distribution channels

Control of strategic resources e.g. Possession of knowledge and skills

responsibility for strategic products e.g. cooperation partners, subcontractors

Possession of knowledge and skills e.g. expert

knowledge that forms the organisations core Through internal links e.g. networking
competence

Control of the environment e.g. negotiation &

network of relationships to external stakeholders

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 Involvement in strategy implementation e.g. as
a change agent or responsibility for strategic projects

Importance of Accounting To Internal Stakeholder

Internal users of accounting information are people who are directly involved in the
management and operation of an entity. Examples of internal users include managers,
officers, sales staff, and internal auditors. Internal users of an entity require the accounting
information for:

1) Management: for analysing the organization's performance and position and taking
appropriate measures to improve the company results.

2) Employees: for assessing company's profitability and its consequence on their future
remuneration and job security.

3) Owners: for analyzing the viability and profitability of their investment and determining
any future course of action.

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Importance of Accounting To External Stakeholder

External users comprise parties outside the entity which have direct or indirect interest in an
entity. Each of the user group may use the accounting information for different purposes. For
example:

(a) Current Investor/Future Investor/Shareholder

(i) Determine whether to invest or not; and

(ii) Increase or reduce investment.

(b) Creditor (Including Supplier) and Bank

(i) Appraise firms ability to repay loan

(ii) Determine whether granting a loan is viable or not.

(c) Government (Inland Revenue, Statistic Department and Regulatory bodies)

(i) Ascertain the tax to be imposed;

(ii) Ensure compliance of regulations; and

(iii) Oversee the running of an organisation which complies to government regulations.

(d) Trade union, Non-government Organisation (NGO)

(i) Welfare of society; and

(ii) Salary negotiations.

(e) Customers

(i) Determine whether to buy or not to buy a particular product or service.

(f) Directors and Managers

To make decisions about the organisation in different time and in different level. Directors
and managers of the organisation are taking different types of decisions as follows.

(i) About new investment and project appreciation decision.

(ii) About continued and discontinued operations.

(iii) Dividend decisions

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(iv) Diversified business decision.

(v) Winding up decision.

(vi) To establish overall objectives and periodical targets.

(vii) To avoid dissimulations and corruptions.

(vii) To establish squired systems and strengthens control of procedures.

(ix) To increase the productivity level of the organization

(g) External auditor.

(i) Ensure compliance of accounting and auditing standards and policies. Decision-making
process can take place at all levels within an organisation. At each level, decisions may be
made even when there is uncertainty. Information is required to minimise the uncertainty.
Various divisions within an organisation are accountable to provide information to the parties
involved in decision making. Even though information is collected for its benefits, there are
also costs involved. Therefore, before collecting the necessary information, a cost-benefit
analysis needs to be carried out. It is economical to collect information if the benefits are
more than the costs involved. Other than costs and benefits, quality and timeliness should
also be taken into consideration in determining the quality and type of information to be
collected.

17
Relate Concept of Accounting to Decision Making

Small business owners are faced with countless decisions every business day. Managerial
accounting information provides data-driven input to these decisions, which can improve
decision-making over the long term. Small business managers can leverage this powerful tool
to help make their business more successful by understanding how management accounting
benefits common business decision contexts.

Relevant Cost Analysis

Managerial accounting information is used by company management to determine what
should be sold and how to sell it. For example, a small business owner may be unsure where
he should focus his marketing efforts. To evaluate this decision, an accounting manager could
examine the costs that differ between advertising alternatives for each product, ignoring
common costs. This process is known as relevant cost analysis and is a technique that is
taught in basic managerial accounting courses. The same process can be used to determine
whether to add product lines or discontinue operations.
Activity-based Costing Techniques
Once the company has determined what products to sell, the business needs to determine to
whom they should sell the products. By using activity-based costing techniques, small
business management can determine the activities required to produce and service a product
line. Embedded in this information is the cost of customers. Deciding which customers are
more or less profitable allows the business owner to focus advertising toward the consumers
who are the most profitable.
Make or Buy Analysis
A primary use of managerial accounting information is to provide information used in
manufacturing. For example, a small business owner may be considering whether to make or
buy a component needed to manufacture the company's primary product. By completing a
make or buy analysis, she can determine which choice is more profitable. While this
technique is certainly useful, small business owners should only use these analyses as a factor
in the decision. There could be other non-financial metrics that are important to consider that
would not be part of the analysis.
Utilizing the Data

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Managerial accounting information provides a data-driven look at how to grow a small
business. Budgeting, financial statement projections and balanced scorecards are just a few
examples of how managerial accounting information is used to provide information to help
management guide the future of a company. By focusing on this data, managers can make
decisions that aim for continuous improvement and are justifiable based on intelligent
analysis of the company data, as opposed to gut feelings.

Conclusion

From the above we can conclude that accounting not only helps an enterprise to conduct its
day to day activities smoothly but also helps in its future growth. At the same time financial
statements produced by various accounting systems are used by multiple stakeholders to take
economic decisions. Proper reporting and accounting practices helps in maintaining
investors confidence and brings economic growth as well. Accounting to concepts of
accounting and important of accounting to stakeholder does provide the bases in preparing,
presenting and interpreting general-purpose financial statements. Accounting is a service
activity. It is important as it provides quantitative information of financial nature to various
stakeholders which is intended to be used in making economic decision. These stakeholders
include investors, management, government, suppliers, financiers, regulators etc. Business
accounting help in making a number of short term and long term business decisions which
helps an enterprise to grow as well as penetrate in market.

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