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ACCOUNTING PRINCIPLE (Basic Accounting Concept:), Business Entity (Assume…
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Business Entity
- Assume that a business is separate and distinct from its owner and every other owner.
- Item recorded in business's books are limited to transactions affecting the business only.
- Records and reports of a business should not include either the transactions or assets of another business or the personal assets and transactions of its owner or owners.
Materiality
- For a large business, an expense of a few thousand ringgits would not be material, but for a small business it might be.
- Financial statements only need to include information that will be significant (material) to their users.
- A transaction is considered to be material if it significantly affects the reported net income of the business.
Going Concern
- A business is a going concern that will continue to operate in the foreseeable future, using its assets to carry on operations, and with the exception of merchandise, not offering the assets for sale.
- The business enterprise will have a long life and that it will last long enough to fulfill its objective and commitment.
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Consistency
- In other words, companies should not bounce between accounting rules and treatments to manipulate profits or other financial statement elements.
- Refer to the principle that companies should use the same accounting methods to record similar transactions over time.
Neutrality
- Neutrality is lost if the financial statement are prepared in order to influence or affect the user to make decision in order to get a predetermined outcome/result.
- Information must be free from bias to be reliable.
Accrual
- Accrual have 2 types which is:
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- Monetary/Money Measurement
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- Money is the common denominator.
- Monetary unit provides an appropriate basis for accounting measurement and analysis.
- Monetary unit is the most effective means of expressing to interested parties changes in capital and exchange of goods and services.
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- Expenses must be recorded in the accounting period which they are incurred irrespective of whether they have been paid or not.
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- Revenue are recorded in the accounting period when they are earned irrespective of whether the money has been received or not.
- Through times to identity trends.
- With other entity's financial statements to evaluate their relative financial positions and performance.