What is concept? As we know, concept is just as a meaning of a principle. Concept is quite important for us to make something more whole or to make something easier to understand. Basically everything has its own concept such as a car, a business, etc. We are going to focus on the accounting concepts in this report. In a financial report, we will find out a lot of accounting concepts. What are these accounting concepts? What is the usage of those accounting concepts and what is the limitation for these concepts? In this report, we will learn and know clearly about those function of the accounting concept such as money measurement concept, historical cost concept, and so on.
Money measurement refer to the transactions can be measured in some monetary units. The transactions which can expressed in money such as purchases of goods or receipt of income will be recorded in books of accounts. Some transactions that cannot be expressed in term of money such as health of the owner of a firm or strike in a firm by workers are not recorded in books of accounts. The company must record the transactions in same currency like RM in every accounts.
It means that the items which shown in money term only can be recorded in the financial statements. These transactions can be measured in the money term, based on Ringgit Malaysia (RM). However, the transactions that are not possible to measure in the money term which is in RM, cannot be recorded in the financial statements. For example, if you sell a motor vehicle with the value of RM20,000, then, we will debit the bank account and credit the motor vehicle account with the value of RM20000 due to this item can be measured in RM and it is show in the currency of Ringgit Malaysia (RM).
There are a lot of benefits by using money measurement concept in a business. One of the benefits is it is more meaningful, easier and convenient if using this concept as if compared to the method of add physical units of, say, and pineapples to get a meaningful total. And it is convenience for outsider such as investor to compare with others company by using this concept. There are disadvantages in this concept as you may use the accounting to know something about the business but not every information you can get from it. An accounting will not show you that is the manager of the business perform well or bad, there have any problems with the workforce or a product have the rival to take away the buyers or not. Besides, the value of money will be affected by some factors such as inflation factor, social factor, deflation factor and so forth.
Money measurement “Page 47 and Page 48 of the Annual Report SHIN YANG SHIPPING CORPORATION BERHAD” under “2.6 Foreign Currency (a) Functional and presentation currency” shows that the financial statements of each entity in the Group and the company are presented in Ringgit Malaysia (RM). Basically it is using the exchange rates to determine the fair value. The expenses and income are translated at exchange rates at the dates of the transactions. Then, the liabilities and assets of foreign operations are translated into RM at the rate of exchange ruling at the reporting date. All of the records is presented in the same currency. No matter in the Statements of Profit or Loss or in the Statements of Financial Position, the business transactions are presented in the currency of Ringgit Malaysia (RM).
Historical cost is a measure of the value used in accounting in which the price of an asset on the balance sheet is based on its nominal or original cost and commonly called actual costs.
The value of an account is based on the amount that actually paid for. The cost figure will be recorded and remained in the accounts until all the assets are sold out. All the assets are shown in the price that actually bought or paid, which is original price. For example, in July, Robert bought 10 units of the bottle which is RM30 per unit. However, in August, the price of the bottle is RM40 per unit. So, the price we have to record in the statement of financial position is RM30 but not RM40.
The advantages of this concept are it has comparability and the accounting information is more reliable. Besides, it is dealing with an undertaken valuation. If the value based on undertaken, it will become more objectivity and more verifiable. On the contrary, the disadvantages, there are no allowance will be made for the changing value of money if the cost value of the assets are placed with historical cost. Next, it is poor function for the users of financial statement as they know only how much is paid out but do not know how worth is it for currently. For example, they know about the value of the purchases for the land, but they do not know currently how worth is it.
Historical cost “Page 41 of the Annual Report SHIN YANG SHIPPING CORPORATION BERHAD” under “2.1 Basis of Preparation” shows that the financial statements of the Group and the Company have been prepared on the historical cost basis which means the value recorded in the accounts for an asset would not be changed until later if the market value of it asset changes. Thus, it will be easier during sorting and counting. For instance, the financial statement of the Group, at the beginning of the year, 1 July 2014, the historical cost of leasehold land is RM 132,432,026, then at the end of the year and the beginning of the next year, which are 30 June 2014 and 1 July 2015, the cost still is remain constant. The situation is continuously. It can be seen clearly by following year. At the end of the year, 30 June 2015, the cost still is RM 132,432,026.
Consistency concept mean that once you choose an accounting method and must using it until end. In other words, the firm cannot use one accounting method this year and use another accounting method next year.
This concept means that we must use the same way to value the stock or the way of calculating depreciation, from period to period. This concept also shown that once it is adopted, the way of calculating or recording must be consistently followed in your future’s accounting. As an example, last year annual report we use the straight line method to calculate the depreciation of all motor vehicle, this year annual report we also use the same method to record or calculate which is straight line method. And for the next year or future, the way to calculate or record also remain.
One of the benefit if using this concept is the profit will not low for a particular accounting because all the accounting method that adopted is same. [Source: Dyson, J. (2010). Accounting for non-accounting students. Harlow: Pearson Education Limited, pg. 29] Secondly, it is able to compare from period to period by using this concept. There are few limitation of consistency concept. For instance, if the manager want to report more value of the profit or revenue than the amount that be allowed, normally this concept will be ignored. Furthermore, mostly, the financial reporting’s requirements and the accounting concept are used to determine the cost calculation. Under these assumptions, the cost counted may have limited decision usefulness.
Accounting period is a period of time such as a year or three months. A company prepares its internal or external accounts in a period of time. A firm prepares the financial statements for publication or tax reporting based on accounting period. Financial statement for publication may be in three months and other else.
This concept is enabling the preparation of the external and internal account of the firm’s financial statement at all times. It may be one month, a quarter year, or any period of times but commonly is one year. At the end of the year, the statement of profit or loss and balance sheet will record the accounts. For example, we record and prepare the statement of profit or loss and statement of financial position from period to period like from 1 January 2013 to 31 December 2013.
Usefulness of this concept are the life of business able to be divided into short period of time so the interested parties are able to know about how the business faring over its life through the financial result. Secondly, it is able to compare and do analysis for the financial position of the business once using this accounting period. Thirdly, the owner need not to wait for a long period of time to determine the exact amount of the profit or loss of the business. While for the limitation of accounting period concept are, the transactions that is made have to identify with the specific accounting period but in practice it affects over an accounting period. Besides, in respect of doubtful debt, depreciation and others, arbitrary allocations is necessary. Also, some accounting concepts such as matching and others are necessary to be developed relate to the transactions to particular accounting periods.
Dual aspect concept is a basic double-entry accounting system and we have seen that every business transaction has two effects. The two effects of transaction are debit side and credit side. For every transaction must record in two different accounts.
Business transaction is the basis of double entry accounting system which has stated in this concept. It means or states also accounting equation which is the amount of liability sum with the equity is same as the amount of assets. The transaction is being differentiated and calculated into two sides which are debit side and credit side. As an example, John is the owner and he is managing a restaurant, at the end of the month, he pay the salary, RM3000 to the staff. This will affect the expenses increased, so the salary account debited RM3000, and on the other side, it affects the assets decreased, so the bank account be credited RM3000.
Basically, this concept benefits the businesses because it may not be limited the usage and it is able to record the payment or receipt formally due to it devised for the account which is for every aspects of the transaction. Also, it is able to guarantee all the transaction for every aspects is being recorded, calculated, or accounted in the financial statements. Moreover, it also makes the financial statements better and more reliable. Next, it makes easy for the auditors and more acceptable due to the format of this concept. For the shortcoming of this concept, this concept does not have any solution to solve the problems of omission. If the transaction is not recorded entirely, the errors are not able to detect. Secondly, it is also no way if the problem of compensating happened. For example, if the bank account is wrongly debited extra RM15 and the receivable account also wrongly credited extra RM15, it still be calculated and recorded in the Trial Balance but the error in the account is still remain unchanged.
Dual aspect “Page 35 and Page 36 of the Annual Report SHIN YANG SHIPPING CORPORATION BERHAD” at the “Statement of Financial Position as at 30 June 2016” indicates that the accounting of the business transaction based on this concept actually help in identifying the two aspects of a transaction which helps in applying the rules of accounting the transactions in books of prime entry. Hence, for the checking of the business transactions, it can reduce the error of recording. The accounting equation shows that assets are equal to liabilities plus capital which states that the assets of a business are equal to the claims of owner and the outsiders. In the Statements of Financial Position of annual report 2016 of SHIN YANG SHIPPING CORPORATION BERHAD, it shows that the total assets of the company in Year 2016 is RM 1,272,268,060, then total equity and liabilities in the Year 2016 is RM 1,272,268,060 also. In this case, dual aspect concept was proved by the above accounting equation
By and large, from the annual report of SHIN YANG SHIPPING CORPORATION BERHAD, we know that how the accounting concepts are being used and how to be applied in financial statement or accounts. From the research, we have learnt about the functions, the definitions and the limitations of these accounting concepts which are money measurement, historical cost, consistency, accounting period and also dual aspect concept. These accounting concepts has enable the firm to record or calculating easily. We have understood to these concepts and knew the important of the concepts of a business even in our life. Other than knowledge, we noticed the important of cooperation with each other. From all the benefits stated, we are grateful for doing this assignment.