Tutorial 5 Accounting Concepts 1 LTJ 2022
Tutorial 5: Accounting concepts and conventions
Part A:
1. For each of the following statements, state the accounting concept that is most closely related to it:
a) Once a particular financial period is adopted by a business, it is not changed from one period to the next.
Consistency Concept
b) The financial statements of a business report the economic activities of the business only and do not include the economic activities of the owners of the
business.
Business Entity Concept
c) Generally a business is assumed to have an indefinite life, unless there is evidence to indicate otherwise.
Going Concern Concept
d) The cost of a calculator in an office is treated as a period expense rather than depreciating its cost over its useful life.
Materiality Concept
e) The record of credit sales is done by referring to sales invoices issued to customers.
Objectivity Concept
f) An accountant generally recognises losses when there is evidence to indicate a high probability of the losses occurring, but gains are not recognised until
they are actually realised.
Prudence Concept
g) Business premises is shown on the statement of financial position as RM100,000, its original cost 15 years ago, although its current value is RM1.5
million.
Historical Cost Concept
h) Expenses are recognised in the same accounting period as the revenues which result from the incurrence of these expenses.
Accrual Concept
2. For each of the following independent situations, one or more accounting concepts have been violated. State the concept(s) that has been violated and
explain the correct procedure that should be used.
a) Depreciation expense was not recorded for the current year because the management wanted to show a higher net profit.
Tutorial 5 Accounting Concepts 2 LTJ 2022
Accrual Concept, Prudence Concept
b) Mr.Tan, the owner of a sundry shop, included his family’s personal use of some of the goods as business expenses.
Business Entity Concept
c) The Classic Shop reported its stock of antique paintings at RM700,000, the selling price, instead of RM300,000, the cost of the painting. The difference
was recorded in the Statement of Profit or loss as an extraordinary gain.
Prudence Concept/Historical Costs Concept
d) A motorcycle shop reports all its assets at current market value instead of its original cost less accumulated depreciation.
Historical Costs Concept
e) Extreme Trading changes its stock valuation method every year. Management would choose the method that will report the kind of net profit that it
wants to portray to its shareholders.
Consistency Concept
f) Arts Deco, records revenue on receiving a customer’s purchase order instead of when it delivers the goods to the customer.
Accrual Concept/Realisation
g) F&M has been sued by a local authority for polluting the river behind its premises. There is a 60% chance that the company will have to pay out a very
heavy fine which will drastically reduce its net profit. This was not mentioned in its recent financial statements.
Substance over form concept/Prudence Concept
Part B: (Questions for students own practice)
Question 1
Kathy argues that since her business deals mostly with cash, it is not necessary to record the utilities incurred for the month of December although the utilities
bills have been received but not yet paid. She plans to pay them in January next year and feels that these expenses should be recorded only in January next year.
What would you advise her?
Accrual Concept
Question 2
Tutorial 5 Accounting Concepts 3 LTJ 2022
You are the accountant of Big Boss Trading. From your experience, you noted that there were always some customers that have failed to settle their debts in the
past. Therefore, you have proposed to provide an allowance of doubtful debts of 3% on the total trade receivables amount of RM1.5 mil. Your boss has strong
objected to this proposal. How would you advise him?
Prudence Concept
Question 3
John, an eager junior bookkeeper is concerned that the firm he is working for does not record depreciation expense for the firm’s pencil sharpeners. The cost of
these sharpeners amounts to RM100 and can be used for 2 years. He feels that these sharpeners should be depreciated using the straight-line method of
depreciation. What is your opinion?
Materiality Concept
Tutorial 5 Accounting Concepts 4 LTJ 2022
