Based on the saying of Wood (2012), Accounting is process which allows users to identify, measure and communicate economic information to help users to make decisions for the information.. It is a system of recording, summarizing, analyzing and interpreting the financial transaction. Accounting concepts can help in broading the policies. The annual accounts communicate the results of an organization’s monetary outcomes. All reports are prepared by a firm must be in accordance with certain principles and regulations. (Gupta and Radhaswamy, 1999)
A study of Wood and Sangster (1996) showed that by accounting concepts and conventions are guidelines or standard rules that been accepted and generally recognized in the processing and presentation of accounting data. In order to make sure that the income statements have been done to avoid misunderstanding between and among the preparers and users of income statements, we must follow the accounting concept as foundation of the company and business. Therefore, accounting concepts and conventions must be known to understand the accounting process when preparing and interpreting financial statements. For example, each user can understand the financial statements, assuming that they are from different companies.
These are the few types of accounting concepts, historical cost, matching, consistency, accrual and more. Mc Mahon (1995) defines a great need for financial support for the preparation of financial statement with the purpose of providing access to such factors as creditors, entities, government and merchants.. It also aids on set up policies for related activities, such as business, sales, and money. However, there are similar situations in assessing financial plans, such as costs and disability benefits.
Historical cost refers to the actual cost paid or incurred during a transaction. The following price or cost shall be recorded in every asset purchased and the expenditure. It will remain unchanged in the future although its market value changes. Therefore, the asset value is always known and the depreciation can be adjusted. To review the amount of cost expended to acquire an asset, the historical cost principle is used. Based on Averkamp (2018), other than determining past opportunity cost, it can be used to match against alteration to the assets owned which are related to the interest or expenditure.
According to Bragg in 2018, accrual is used to report the net income in a company’s financial performance. The expenditure incurred for an accounting period should be recorded although the trader not yet paid. A business will not be able to reflect the actual level of economic activity without accruals, the amount of income, expenditure and profit or loss in a period of time.
Said by Jan (2018) states that consistency is a process of recording the particulars into the accounts continually or constantly for each accounting period. It is important to record the accounts consistently to avoid irregularities in financial reporting. Meanwhile, it can also provide an accurate vision of business activities. Moreover, the income statements of a particular accounting period can be compared with the income statements for other accounting periods.
There are some items will be recorded as inventory as its actual cost although its replacement cost has actually increased. An advertising expense need to be recorded at the amount in annual income statement even if the supplier has actually changed advertising rates sometime during the year. If the total sale occur annually amount to RM167,678, RM167,678 is necessary to record in the statement although the selling prices are increased.
Accrual accounting will give a clearer vision for our business to grow while cash accounting only gives an idea of how much money we have. For example, if the buyer has not yet pay for the shipment of the goods you’ve sold, it should also be recorded as the sale is made and the money will still be paid. All the income and expenses are required to be recorded in the accounting periods to which they relate under accrual concept in the financial statement rather than on cash basis.
Consistency are important to ensure that the accounting method had been applied for the future year. Consistency are usually used on calculating depreciation on its fixed assets. For example, a company will use straight method continuously to calculate the depreciation. If there are any unreasonable change on the accounting method, there will be incorrect calculation of depreciation which will lead to wrong financial report of the company.
Nandwa (2018) emphasise that the historical cost is user-friendly because we do not need to check on the market values. Hence, cooperation only required to find the original value of the assets. Users will not need restate the changes caused by the influence by inflation every year.
SOFP include of fiscal and non-fiscal items. It cannot bestow a fair value of financial position. As shown in their current cash value, the examples of fiscal items are included cash, loan, debtors, creditors and more. Non-fiscal items like inflation, building, land are recorded at original value but not at latest value. Throughout the inflation stage, non-fiscal items are undercast. Therefore, the true value fails to sow in SOFP to the financial position.
A company system that uses the accruals concept will showcase the company’s profit even if the payment hasn’t yet changed hands. Shareholders would like to invest to a business who makes profit and ensure that they will get a full money return on their investments while accrual concept will provide the real profit to the shareholders. (Sweeny, 2018)
The limitations of accrual concept are it needs longer time and the company have to employ professional workforce. This is because the company need to make adjustment of the accounts.
According to Averkamp (2018), the consistency able to compare the financial statements from one period to another period. It also applied in the same accounting principles from year to year. If businesses want to change the accounting principles, the amount of net profit should record continuously in the business operation.
Consistency also contains limitations which when a mistake occur, the mistake needs to be excluded from the balance sheet because it could be consistent. If there is any mistake on accounting method, users must give evidence on the financial report and provide the reasons to change.
The company that we have selected to do research is Padini Holding Bhd. The three accounting concept that practiced to a company’s financial report is historical cost, consistency, and accrual concept.
In term of historical cost it was stated in the report that “the financial statement is prepared at historical cost unless otherwise indicated in the financial statement.” (Appendix A) This indicated that most of the transactions in this company were recorded at their original costs incurred during the time those transactions occurred.
Padini noted in their financial statements that their directors have guaranteed that appropriate accounting policies are used systematically. (Appendix B) Besides that, the committee agreed on the basis used for the calculation which has been applied consistently. (Appendix C) This matched the consistency concept which suggested that in each accounting cycle a similar accounting method should be used. The accounting policies used for the year are consistent with the accounting policies of the previous year, except for the new MFRSs for the fiscal year. (Appendix D)
In relation to accrual concept, it was maintained in the report that in accordance with the material of the relevant contracts, the royalty payments and master licenses is identified on an accrual basis. (Appendix E)
(Padini Holding Bhd, 2018)
Accounting concepts provide a foundation for a company or business in preparing income statement per annum. With the guidance of the accounting methods, every monetary transaction that occurs is illuminated taking into consideration with the accounting concepts. To save up cost for a company or business, accounting concepts can help process the information efficiently at a lower cost. As a result, reports can be obtained in a short time and it also helps in decision making and proper planning.
After finishing the assignment, the students have learned how to perform more thorough research from text and websites. The method to note down and bestow the report based on the research requirements was also learnt. Besides that, students were able to learn how to use Turnitin.
As accounting students, this research can help students to improve their accounting knowledge. The definition of the accounting concepts have learnt by the students. Besides that, students have also learnt how to explain and analyse the accounting concepts that are relevant in the exercise. The limitations and the usefulness of the accounting concepts were also learnt. Moreover, student now know how the business of company apply the accounting concepts in their business operations.