ACC 1101
BUSINESS ACCOUNTING 1
GROUP ASSIGNMENT
NO. NAME ID SECTION SEMESTER
1 Aw Jian Hui I09003692 1S2 Jan 2010
2 Tay Choon Shen I09003960 1S2 Jan 2010
3 Tan Chon Siong I09004340 1S2 Jan 2010
Lecturer: Mary Mathews A/P K.A. Mathew
Due date: 30 March 2010
Contents
1.0 Introduction.......................................................................................................3
2.0 Question 1...........................................................................................................5
2.2 Money Measurement Concept......................................................................6
2.3 Going Concern Concept.................................................................................7
2.4 Business Entity Concept................................................................................8
3.0 Question 2...........................................................................................................9
4.0 Question 3.........................................................................................................10
5.0 Conclusion........................................................................................................13
6.0 Reference..........................................................................................................14
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1.0 Introduction
Accounting is the process of financially measuring, recording, summarizing and communication
the economic activity of an organization. It is often referred to as “the language of business” and,
like any other language, it has its own unique vocabulary and rule. However, technical
accounting terms such as assets, liabilities, equity, revenue, expense, income and cash flow are
widely used throughout the micro-finance field.
The role of accounting is falls into tow general categories: financial accounting and management
accounting. Financial accounting presents a summary view of the financial results of past
operation. Financial accounting reports are aimed at external audiences although they are widely
used internally as well. Management accounting information is tracked and presented at a much
more detailed level, such as by programme or branch. Projected financial information is also a
part of management accounting and is aimed primarily at internal audiences. Management
reports are prepared frequently and report on an ongoing basis the differences between planned
and actual results.
Accounting concepts consist of:
The Business Entity Concept
The Cost Principle
The Going Concern Concept
Double-entry Accounting
The Realization Principle
The Matching Principle
The Consistency Principle
The Conservatism Principle
The objectives of accounting including letting people and organization know:
If they are making a profit or a loss;
What their business is worth;
What a transaction was worth to them;
How much cash they have;
How much wealthy they are;
How much they owed;
How much they owe to someone else;
Enough information so that they can keep a financial check on the things they do.
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However, the primary objective of accounting is to provide information for decision making. The
information is usually financial, but can also be given in volumes, for example the number of
cars sold in a month by a car dealership or the number of cows in a farmer’s herd.
So, for example, if a business recorded what is sold, to whom, the date it was sold, the price at
which it was sold, and the date it received payment from the customer, along with similar date
concerning the purchases it made, certain information could be produced summarizing what had
taken place. The profitability of the business and the financial status of the business could also be
identified, at any particular point in time. It is the primary objective of accounting to take such
information and convert it into a form that is useful for decision-making.
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2.0 Question 1
For the purpose of external reporting, a number of accounting concept has been applied. Among
them are: historical cost concept, money measurement concept, going concern concept and
business entity concept. Can you explain each one of the concept and support with an appropriate
example.
2.1 Historical Cost Concept
Historical cost is the original financial value of an economic item. Historical cost is based on the
stable measuring unit assumption. In some situation, assets and liabilities may be shown at their
historical cost, as if there had been no change in value since the date of purchase. The balance
sheet value of the item may therefore differ from the "true" value.
While historical cost is criticized for its inaccuracy (deviation from "true" value); it remains in
use in most accounting systems. Various corrections to historical cost are used, many of which
require the use of management judgment and may be difficult to implement or verify. The trend
in most accounting standards is a move to more accurate reflection of the fair or market value,
although the historical cost principle remains in use, particularly for assets of little importance.
Historical cost concept is the situation in which accountants record revenue, expenditure and
asset acquisition and disposal at historical cost: that is, the actual amounts of money, or money's
worth or the fair value of the consideration given to acquire them at the time of their acquisition,
received or paid to complete the transaction
Depreciation affects the carrying value of an asset on the balance sheet. The historical cost will
equal the carrying value if there has been no change recorded in the value of the asset since
acquisition. Improvements may be added to the cost basis of an asset.
Historical cost does not generally reflect current market valuation. Alternative measurement
bases to the historical cost measurement basis, which may be applied for some types of assets for
which market values are readily available, require that the carrying value of an asset (or liability)
be updated to the market price (mark-to-market valuation) or some other estimate of value that
better approximates the real value.
This concept basically does not encourage the use of current cost or replacement cost. Hence, it
does not look into what the assets might have cost when we need to replace it. Only, the price
paid is recorded.
For example, Company A has a piece of property purchased quite a few years ago. The price
paid for this property was $1 million. But, some real estate agents inform the company that now
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the property can be sold many times more than this $1million. Should the company continued to
record in its financial statement, its property at the amount of $1million which was the price that
was paid to acquire this land. Based on historical cost concept, the company shall still continue
to record the value of $1 million in its financial statement.
2.2 Money Measurement Concept
The money measurement concept underlines the fact that in accounting, every recorded event or
transaction is measured in terms of money. Using this principle, a fact or a happening which
cannot be expressed in terms of money is not recorded in the accounting books.
One of the basic principles in accounting is “The Measuring Unit principle”: The unit of measure
in accounting shall be the base money unit of the most relevant currency.
This principle also assumes the unit of measure is stable; that is, changes in its general
purchasing power are not considered sufficiently important to require adjustments to the basic
financial statements.
Numerous transactions affect the business in a varied ways. However, recording, classification
and, particularly summarization of these business transactions requires that these transactions are
expressed in terms of a common unit of measurement. For accounting we assume that money
serves as a common denominator for expressing business transactions. Hence transactions even
if they affect the results of the business materially, are not recorded if they are not convertible or
capable of being expressed in money terms. It is to be noted that changes in purchasing power of
money is ignored for the purpose of accounting. Hence this concept is called stable money
measurement concept.
By now, knowing this concept, you should realize that the financial statements will not generate
qualitative, economic and non financial information. At times, this limitation might pose a
disadvantage to the users of the financial statement like the investors, fund’s managers, suppliers
and others.
For example of money measurement concept:
Say if you are an investor who is interested in purchasing over a company who own a factory. In
the company’s financial statement, do you think you are able to see such statistics like consumer
price index, number of loyal customers, industrial output, the factory’s productivity ratio, factory
staff turnover rate, number of shift, wastage , and so on ?
The answer will be no as this concept deals with resources and obligations that can be measured
and quantified into financial terms.
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2.3 Going Concern Concept
This going concern concept assumes that the business entity will continue in business in the
foreseeable future. As the intention is not to close its business, the company should not value
their assets at amount realizable on a forced sale/ liquidation sale.
Business transactions are recorded on the Assumption that business will exist for a long time. No
intention to wind up its business affairs. Fixed Assets are shown in balance sheet at a
diminishing method. There is neither the intention nor the necessity to liquidate the particular
business or venture in Foreseeable Future. Therefore, it is because of this concept that a business
is able to use its resources according to the plans and predetermined goals and creates contractual
obligations.
It is very important to understand that the Board of Directors needs to make all necessary
assessment of the enterprise’s ability to continue as a going concern.
Uncertainty on going concern should be disclosed and if the enterprise’s financial statements are
not prepared on a going concern, its needs to disclose all the facts and the basis and reason. it is
because of this concept that:
A clear distinction is made between assets and expenses.
Fixed assets are valued at cost less proper depreciation keeping in mind their expected
life ignoring fluctuations in market price of these assets.
However, it is certain that a business will continue for a limited period, then the accounting
records will be kept on the basis of expected life of the business.
For example: A listed Company ABC’s share price has nose dived to 40% level of what you seen
six months ago due to speculation by market punters?
Yes, the company ABC is definitely on a going concern. There are no fundamental changes in its
business.
But what this time the scenario is due to increased competition or advanced technology, the
company ABC revenue is has decreased very drastically so much so that it’s unable to pay its
creditors, loans and other financial obligations.
In this case, the external auditors will need to qualify Company ABC’s financial statement
pertaining to it going concern.
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2.4 Business Entity Concept
The business entity concept requires that you define the organizational component for which you
are trying to account. It is the unit standards apart from other organization and individuals as a
separate economic nut. From an accounting perspective, sharp boundaries are drawn around each
entity so as not to confuse its affairs with those of other entities. Business entity is treated
separate from its owners. It is the distinction between business transactions and personal
transactions. Business and ownership are taken as separate entity.
By understanding this concept, we then realized that all the financial data will only be related
directly to the activities of the business. The business is a separate by itself. It’s run by a
professional board of directors who is responsible and accountable for the every day’s running of
the business. If the owner of the business receives a salary and dividends from the business, you
will see these transactions on the financial statements of the company. However, if the owner
uses the funds received from the company to buy stock in another company, this will not be
disclosed because it has no affect on the financial status of the business entity.
Accounting is done for business entities as distinguished from the person associated with these
entities. The main crux of this concept is that every transaction is analyzed from the point of
view of a business and not that of the persons who are associated with the business.
For example: when the owner of the business introduces cash in business, accounting records
show that business has got cash, although it does not affect the overall position of owner. At the
same time, business enterprise records that an equivalent amount is payable by the business to
the owner, which is known as capital in accounting. Thus, accounting entity concept enables to
record transactions between business and its owner.
The overall effect of this concept is:
Only the business transactions are recorded and reported and not the personal transactions
of the owners.
Income or profit is the business unless distributed to the owners.
The personal assets of the owners are not considered while recording and reporting the
assets of the business.
It is to be noted that separate entity concept applies to all forms of business enterprises.
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3.0 Question 2
Can you list and explain 3 benefits of using a computerized accounting system
In today’s globalization world, company with a good accounting system is very important. Every
company must have their accounting system because it is generally have to reveal the financial
and management information to government and publics. Every transaction must be recognize,
classified and documented. By using computerized accounting system, a company’s trade record
will be managed well compared to manual writing accounting. It may affect the company’s
performances. There are many benefits on computerized accounting system. A computerized
accounting system has many benefits, including:
Better Record Keeping - whilst human error can still corrupt your data e.g. entering
figures in wrong fields, a good package will reduce this possibility and ensure that there
is a reference for all transactions e.g. for every cheque or receipt entered/created.
However, this does not eliminate all manual work. Vouchers, invoices, receipts etc. will
still need to be filed in a logical order and details of what was entered onto the system
should also be recorded on paper. This will help when you need to track errors, in the
annual audit and if disaster strikes and you have to re-enter all transactions;
Speed and efficiency – data entry onto the computer with its formatted screens and built-
in databases of customers and supplier details and stock records can be carried out far
more quickly than any manual processing. In a manual system receipts and disbursements
are initially recorded in registers. This can involve writing a check and then writing a
description in a register or this can be done on a one-write system. Either way the
transactions in the registers must be manually posted to the general ledger and then
compiled into financial statements. This manual transfer of information is time
consuming and subject to error (such as transpositions).
Cost savings – computerized accounting programs reduce staff time doing accounts and
reduce audit expenses as records are neat, up-to-date and accurate. Computer accounting
saves time and, therefore, saves you money. Small businesses may not require an
expensive accountant for their operations. Savvy owners, who are a little familiar with
basic accounting procedures, can save money by buying dependable accounting software
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that they can use themselves. Once the software is installed, the program guides you step
by step through the accounting process
For Improved Business Performance-Computerized accounting is a highly integrated
application that transforms the business processes with its performance enhancing
features which encompass accounting, inventory, reporting and statutory processes. This
helps the company access information faster, and takes quicker decisions. Computerized
accounting also guarantees real-time optimization of operations and enhanced
communication.
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5.0 Conclusion
As a conclusion, accounting is very important. It can determine one’s company financial status.
With a good accounting system, a company will easy get to know that their company financial
status. This system will let us know the expenses that we had expensed and the revenue that we
will get.
Different type of accounting concept will have its own benefits. Each concept will apply to the
company’s need and wants so that the organization’s goals will achieve. A good decision should
a company made to apply the concept as it will affect the organization future.
Accounting is important to a company as well as the government. The tax that companies need to
pay is determined by the percentage on how much profit they earn. The more their profit, the tax
they need to pay is more. It is compulsory that every company to manage their account. So that,
at the end of every year, they will have to pay government tax and government will have their
yearly revenue.
Company without accounting system will be into trouble. Financial problem will keep on arising
such as over budget, no profit and many more. On the legal side, they will face legal problem
such as government fine, income tax problem and so on. So, it is a must for every company to
have their trade account.
A clear stated account will get to know the net sales, net expenses, company’s properties, net
profits, and stock. It is very important to manage the account in a company.
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6.0 Reference
http://wiki.answers.com/Q/What_are_the_benefits_of_a_computerized_accounting_system
^ Farag, Shawki M., The accounting profession in Egypt: Its origin and development, University of Illinois,
2009, p.7 [12]
^ Rathbone, Dominic: Economic Rationalism and Rural Society in Third-Century AD Egypt: The Heroninos
Archive and the Appianus Estate, Cambridge University Press, ISBN 0521037638, 1991, p.4
^ Cuomo,Serafina: Ancient mathematics, Routledge, London, ISBN 9780415164955, July 2001, p.231
^ Matt. 25:19
^ Lewis, Mervyn K.: Islam and accounting, Wiley-Blackwell, Oxford, 2001, p. 113 [13]
^ Lewis, Mervyn K.: Islam and accounting, Wiley-Blackwell, Oxford, 2001, p. 109 [14]
^ Gandz, Solomon (1938), "The Algebra of Inheritance: A Rehabilitation of Al-Khuwarizmi", Osiris
(University of Chicago Press) 5: 319–91, doi:10.1086/368492
^ Struik, Dirk Jan (1987), A Concise History of Mathematics (4th ed.), Dover Publications, ISBN
0486602559
^ Alan Sangster, Greg Stoner & Patricia McCarthy: "The market for Luca Pacioli's Summa Arithmetica"
(Accounting, Business & Financial History Conference, Cardiff, September 2007) p. 1–2
^ Heeffer, Albrecht: On the curious historical coincidence of algebra and double-entry bookkeeping,
Foundations of the Formal Sciences, Ghent University, November 2009, p.7 [15]
^ a b Heeffer, Albrecht: On the curious historical coincidence of algebra and double-entry bookkeeping,
Foundations of the Formal Sciences, Ghent
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