Fundamentals of Accountings

Introduction

Accounting information needs related and trustworthy to help them in decision making (Fundamentals of Financial Accounting, 2014). Accounting concept is a must for every company, so that they can operate and run their company easily. It is used to solve company’s financial problem, summarizing and communicating financial information. Accountants have to plan financial statements according to standard rules of accounting called accounting principles and concept (Fundamentals of Financial Accounting, 2014).

Money Measurement Concept

This concept states that only transactions and activities that can be measured in terms of money and whose monetary value can be accessed with rational objectivity will be entered into the accounting records (Book-keeping and Accounts 8th edition, 2013). Any transactions and events which have assign a reliable monetary value should be recorded in the financial statements while all the transactions and events which does not provide a trustworthy monetary value should not be entered into accounting system.

If a employee receives salaries expense, commissions and pension obligations, all these transactions are reliable to be recorded into the financial statement. However, skills, performance and competence of employees which does not be included in monetary value should not be recognized into the accounting system.

This concept enables the users of financial statements such as internal or external users can understand the accounting reports more easily because the business is all about money. However, the value of money is not stable because of inflation or deflation, so if the business includes international transactions, the value of money changes irregularly with exchange rates (Divyesh Patel, 2014)

The money measurement concept is applied in the annual report of Bonia, i.e page 119 under Note 4.18(a) Foreign Currency shows that the items included in the financial statements of each of the entities of the group are measured using the currency of the primary economic environment in which the entity operates or know as the functional currency (Refer Appendix 5). This concept is clearly shown in all the Statement of Financial Position, Statement of Profit or Loss and Other Comprehensive Income. Statement of Cash Flow and Statement of Changes in Equity and under Note 1 Corporate Information page 102, these financial statements are presented in Ringgit Malaysia which is also the functional currency of the company (Refer Appendix 1, Appendix 2, Appendix 3, Appendix 4 and Appendix 5).

Prudence or Conservatism Concept

This concept is an accounting principle that needs an accountant to record liabilities and expenses as soon as they arise, but revenue only when they are realized (Reference, 2016). Under this concept, an accountant will report the lowest income or the lowest value of assets and the highest amounts of liabilities (Business Accounting 3rd edition, 2010). In other word, an accountant should not overstate assets and income and also should not understated liabilities and expenses.

Inventory is included in the assets of a company. By using this concept, inventory of a company is recorded at lower of cost or net realization value (NRV) while it is not recorded at the expected price of selling. This can ensure the profit or income earned from the sale of inventory will only realized when the actual sale occurs. For example, a company has an closing inventories at cost RM 78,000 while RM 89,000 at market value. Thus, when actual sales occur, the company is recorded the closing inventories at value RM 78,000 not at value RM 89,000 in the financial statement.

This concept enables the users of financial statements will not get a misleading and false hopefulness financial reports and can promote a faithful performance. However, this concept may cause a fake impression of the entity being in a worse financial position than it actually is (The Student Room, 2011). This will result in potential investors withdrawn from the company.

The prudence or conservatism concept is applied in the annual report of Bonia, i.e page 111 under Note 4.10 Inventories shows that inventories are stated at the lower of cost and net realization value (Refer Appendix 5). This concept is clearly shown in Statement of Financial Position page 94 and under Note 14 Inventories page 153, inventories of the group recognized at cost of sales amounted to RM 284,520,000 (2014:RM 269,333,000) during the the financial year (Refer Appendix 1 and Appendix 5).

Historical Cost Concept

Financial Statement must write down in the books of accounts or journals at cost, that amount formerly paid while the transaction occurred (Financial Accounting, 2013). Accounting involved past events and it refers to constant and contrast that is why it requests the accounting information to be recorded as historical cost. As the assets value increase, it is no need to change the value of increasing but just remain the value at origin cost (Obaidullah Jan, 2011-2013).

In the year of 2010, company purchased machine for factory used on cost RM100,000. While in the future year the cost of machine has increased to RM250,000. According to the historical cost concept, accountant must record the cost of as RM100,000 so that the market values of change will not affect the whole fabric of accounting, impair comparability and makes accounting information unreliable (Obaidullah Jan, 2011-2013).

This concept enables users of financial statement of business become objectivity which  records the original cost of an item when it was purchased. According to Elliott, ”the data is supported by independent documentary evidence, such as invoice, statement, cheque counterfoil, receipt or voucher” (B.Elliott and J.Elliott, 2009). However, this concept may also cause fake impression that is lack of relevance which is also an important attribute of financial reporting for decision makers (Alexander and Nobes, 2004).