Accounting Concepts

Accounting Concepts: Consistency, Going Concern & Prudence

What are Accounting Concepts?

It is the basic rules, ideas, and conditions by which companies record their financial transactions and organize their bookkeeping.

What is the objective of Accounting Concepts?

To achieve uniformity and consistency in preparing and recording financial reports.

What is Consistency Concept?

The same accounting method should be used consistently once it has been adopted by the company, unless a change is required by law or other valid reasons to do otherwise.

It will prevent manipulation in accounts and make the financial numbers comparable across different periods or years.

What is Matching Concept?

The matching concept is linked to the accruals concept.

It requires revenue earned and expenses incurred to be matched and recorded during the same accounting period.

Example 1:

Deposit of RM 500 received from the customer on 27 December 2022 for a dinner reservation on 10 January 2023.

No expenses have been incurred yet if the RM 500 deposit is recorded as revenue on 27 December 2022.

Hence, the RM 500 deposit should be booked as “Deposit from Customer (Balance Sheet)” in December 2022 and adjusted as “Sales revenue (Income Statement)” in January 2023 to match the expenses incurred on 10 January 2023.

Example 2:

ABC Sdn Bhd’s financial year ended on 31 December 2022. It only issued invoices to its customers in January 2023 for work carried out in December 2022.

An accounting adjustment needs to be made for the unbilled revenue as “Accrued revenue” on 31 December 2022 to match the expenses incurred during the financial year.

What is Going Concern Concept?

Also known as the continuity assumption, this assumption assumes that a business will continue its operations for the foreseeable future.

It implies that financial statements are prepared with the expectation that the business will continue to exist and not be liquidated.

Examples of situations that may cast doubt on the going concern assumption include:

Continuous losses: If a business consistently incurs significant losses, it may raise concerns about its ability to continue operating in the future.
Legal or regulatory issues: Legal disputes, loss of key licenses or permits, or significant changes in regulations can impact a business's ability to continue its operations.

What is Prudence Concept?

This is an accounting concept that suggests caution and a conservative approach in preparing financial statements.

The prudence concept suggests that losses such as bad debts, inventory obsolescence, or decline in the value of investments, should be accounted for even if they have not yet occurred.

However, gains should only be recognized when they are realized.

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