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Fundamentals of Accountings

Autor:   •  November 8, 2018  •  1,839 Words (8 Pages)  •  4 Views

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The historical cost concept is applied in the annual report of Bonia, i.e page 102 under Note 4.1 Basis of Accounting shows that the company have been prepared under the historical cost convention as otherwise stated in the financial statement (Refer Appendix 5). This concept is clearly shown in Statement of Financial Position especially the non-current assets.(Refer Appendix 2). This concept also clearly be represented in page 125 under Note 6.3(h) Provision for Restoration Costs that the group estimates provision for restoration costs based on historical cost incurred per square feet of sales area (Refer Appendix 5).

Business Entity Concept

This concept states that accounts are kept for entities rather than for the persons who own, run, or else are related with those entities (Essentials of Accounting 11th edition, 2013). The personal transactions of the owners are not mixed up with the transactions and accounts of the business (Obaidullah Jan, ACA, CFA, 2011-2013). So, in the other word, it means that the accounts which record the transactions which happen when running a business must be totally separated from the accounts of its owner or the accounts which record the transactions of owner must be totally separated from the accounts of its business.

An accounting equation needs to be used in order to represent this concept of a business which is Assets = Liabilities + Equity or Assets = Equity + Liabilities and it can be elaborated like this as well which is Assets = Equity. Equity is the amount of money invested by the owner into the business or in other meaning is the amount of money which has borrowed by the business to run the company well from the owner and it represents that the business is owing to the owner or is the owner lends money to the business. Thus, it is clearly shown that the business is separated and unique from the owner itself.

This concept enables users of financial statements as they can easily know how to differentiate between the actual performance of a business and the involvement of the owner into the business. This can enable the investors of the business to see whether is the business earn profit or just because the owner keep putting in the money into the business with their contributions or not. Therefore, investors can decide whether to continue putting in their investment into the business or not. However, a primary failure of this concept is that it does not clearly shown that the actual assets and liabilities that are accessible in the reality which means that some assets of the business such as motor vehicles and premises are sometimes be included in both accounts which is shown as non current assets in business accounts and is shown as private assets in the accounts of owner of the business.

Accrual concept

Accrual concept requires to record the revenues they earned but not yet received in monetary terms same as the expenses they are incurred but have not be paid. In other words, accrual concept means sales in credit term and purchases in credit term (Obaidullah Jan, 2011-2013). Based on the accrual concept, we also can say that the differences between total revenues and total expenses are the net income or net profit and net loss for the period (Fundamentals of Financial Accounting, 2014). At the end of each accounting period, every company ends their business and pass adjusting journal entries to note any accruals for instance accruals of rental paid, accrual insurance, adjustment of prepayment and so on (Obaidullah Jan, 2011-2013).

Accrued expenses are recorded as current liabilities, however, accrued incomes are recorded as current assets. These most can be seen at Statement of Financial Position, the accrued expenses and incomes need to be added into those affected expenses and incomes. For example, on 1 Jan, Kelly rents a shop lot for her business. The rent is RM 500 per month. The total rent paid by Kelly paid up to 31 December during the same year is RM 5,500. The last payment due on 31 December rental has not yet paid. So the outstanding rental of RM 500 is recorded as accrued rental under current liabilities.

This concept enables users of financial statement as it grants more useful business analysis for every company so that they can work better. The matching of expenses and revenues allow the company to carry on more useful business analysis. Furthermore, this concept also allows for easy planning so as company can solve its operational problems. By using accrual basis concept, the process for accountant to record account can be easier in planning, particularly that it permits you to record for all expenses and incomes at the right period. However, this concept also gives fake impression as it brings forward some difficulties. The law in approval of incomes and expenses can be very numerous. In addition, this concept also can easily lead to fraud. People can easily change the amount in financial statements when there are some misused or record wrongly to hide their mistakes or weak point within their financial reports. (Fraigmen Edward, 2015).

Conclusion

A coursework is an activity involving co-operation, discussing and planning among group members to work together in order to accomplish the objective of the coursework. This coursework has been useful in understanding what concept would a company use to run or operate their business. After doing this coursework, we can know that the basic accounting framework and concepts used by accountants to prepare the financial statements of a company (Fundamentals of Financial Accounting, 2014).

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