AA015 Topic 2 2023 - 2024

Program Matrikulasi Satu Tahun Perakaunan
Topic 2:
Basic Accounting Concepts
The contents
2.1 Financial Reporting Framework in Malaysia
2.2 Accounting Concepts
2.3 Accounting Equation
2.4 Double-Entry System

2.1 Financial Reporting
Framework in Malaysia
The basic accounting framework and concepts used by
accountants in preparing financial standards in Malaysia
• The financial reporting framework (rangka)

= framework that an entity uses to prepare its financial statements.
= sets the basis for accounting standards that govern how the financial
statements are prepared.
= a set of criteria used to determine measurement, recognition,
presentation, and disclosure of all material items appearing in the
financial statements.
• Malaysian Accounting Standard Board (MASB) has adopted

International Financial Reporting Standards (IFRS) and companies in
Malaysia are required to comply effectively from the accounting period
beginning or after 1 January 2006. Full convergence with IFRS took place
on 1 January 2012. Hence, any reporting standards issued by the
International Accounting Standard Board will directly impact the
Malaysian financial reporting environment.
3
What is the financial reporting framework and used in
Malaysia ?
4
The difference in accounting framework among Generally Accepted
Accounting Principles (GAAP), Malaysian Private Entities Reporting
Standard (MPERS) and Malaysian Financial Reporting Standards (MFRS)
GAAP
•GAAP is a set of accounting principles, procedures and guidelines used by

U.S. companies to prepare their financial statements and other accounting
disclosures. It covers conventions, concepts, regulations, procedures and the
guidelines standards.
• ultimate goal : to ensure a company's financial statements are accurate,

reliable, consistent, and comparable with one another.
• solve different opinions between the accountants.

• help to maintain trust in the financial markets.
If not for GAAP, investors would be more reluctant to trust the information
presented to them by companies (they would have less confidence in its
integrity). GAAP also helps investors analyze companies by making it easier to
perform comparisons between one company and another.
5

• Reporting entities are generally divided into two sectors – public sector and
private sector.
• In Malaysia, private sector entities prepare their financial statements based on

either the Malaysian Private Entities Reporting Standard (“MPERS”) or the
Malaysian Financial Reporting Standards (“MFRS”).
MPERS
•The MASB develops and publishes a separate Standard to be applied to the
general purpose financial statements of private entities.
•The MPERS is based on the IASB’s International Financial Reporting Standard
for Small and Medium-sized Entities (IFRS for SMEs) revised in May 2015.
6
What is SME?
7
MFRS
• MFRSs set out recognition, measurement, presentation and disclosure
requirements dealing with transactions and other events and conditions that are
important in general purpose financial statements. They may also set out such
requirements for transactions, events and conditions that arise mainly in
specific industries.
• fully compliant with the International Financial Reporting Standards (IFRS)

framework, which enhances the credibility and transparency of financial
reporting in Malaysia.
• MFRSs are based on the Conceptual Framework for Financial Reporting,

which addresses the concepts underlying the information presented in general
purpose financial statements. The objective of the Conceptual Framework is to
facilitate the consistent and logical formulation of MFRSs. It also provides a
basis for the use of judgement in resolving accounting issues.
8
Regulatory bodies in Malaysia
• The accountancy profession in Malaysia is governed by the Malaysian

Institute of Accountants (MIA) through the powers conferred by the Malaysian
Accountants Act 1967.
• Other regulatory bodies/ regulations include:

1. Companies Act 1965
2. Financial Reporting Act 1997
3. Securities Commission Guidelines
4. Bursa Malaysia
5. Bank Negara Malaysia
6. Inland Revenue Board of Malaysia (LHDN)
9
Accounting Concepts
Now Future
Going Concern
Economic Entity
The business is accounted for Reflects assumption that the
separately from other business business will continue operating in
entities, including its owner. the foreseeable future.
Monetary Measurement Accounting Period

The economic life of business can be
Express transactions and events in
divided into artificial time period for
monetary, or money, units.
the purpose of financial reporting.
Accounting Concepts
Revenue Recognition Historical Cost

1. Recognize revenue when it is Accounting information is based
earned. on actual cost.
2. Proceeds need not be in cash.
Expense Recognition Full Disclosure

Expenses are matched against Report enough information for
revenue and recorded in the same users to make knowledgeable
period in which the related decisions about the company.
revenues are earned.
Accounting Concepts
Consistency
Consistency means that a company
uses the same accounting
principles and methods from year to
year.
Materiality
Accountants are required to
accurately account for significant
items and transactions.
Objectivity
The financial statements of an
organization be based on solid
evidence.
Accounting Concepts
Prudence
Do not overestimate the amount of assets and revenues or
underestimate the amount of liabilities and expenses.
Only record a revenue transaction or an asset when it is certain, and

record an expense transaction or liability when it is probable.
Also known as the Conservatism concept.
Fair Value Measurement

▪Fair Value is defined as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
▪ This concept states that assets and liabilities should be reported at fair
value (the price received to sell an asset or settle a liability). Fair value
information may be more useful than historical cost for certain types of
assets and liabilities.
❖ Historical Cost
- The acquired assets and services by a company
should be recorded at their actual cost.
- The cost is a reliable measure and can be approved
and company should continue reporting the
historical cost of an asset over its useful life.
Example:
The company purchases a car from supplier at a cost
price of RM20,000 on 21 August 2022. The market
value increases up to RM25,000 on the next day.
Which amount should be recorded by the company?
Why?
Conclusion:
The value of the car should be recorded as the cost
RM20,000 because cost is a reliable measure.
14
❖Monetary Measurement
Money is the common denominator in business. Monetary
measurement is a principle that assumes business transactions
or events can be measured and expressed in terms
of monetary units and they are stable.
Expressing transactions and events in monetary units is crucial

to the use of Financial Statements for business
communications. Example of monetary units are the dollar in
the United States or RM in Malaysia.
Example:
A transaction occurred in the organization but the value cannot
be determined because of inflation.
Conclusion:
The transaction must be recorded in the monetary unit
and the value assumed stable and would not change
under inflation.
15
❖Economic Entity
● The business and its’ owner are two different entities.
● The activities of the business must be kept separated and

distinctively from the activities of the owner and of all
other economic entities such as the creditors, suppliers,
customers etc.
● The entity needs to be evaluated separately from the

owner and the transaction of different entities should not
be accounted for together.
16
❖Economic Entity
Example:
The company purchases a car for his wife by using money
from the business’ operations. He had recorded the purchases
as a business’ assets. Besides that, all the expenses such as
fuel oil were recorded as business expenses.
Solution:
The company does not comply the economic entity
concept. The purchase should be recorded as drawing
because the transaction was a personal transaction.
17
Going Concern
• The business will continue to operate long enough to carry out
its’ existing objectives. It means that the entity will remain in
operation for the foreseeable future.
• Most resources such as supplies, land, building and equipment
are acquired to be used rather than to sell.
Example:
The company purchases a car with a cost of RM20,000 with the
estimated useful life for 10 years . The market value for that car is
RM25,000. It is suggested that the car should be depreciated for 5
years because the business is expected to be liquidated in a short
period.
Conclusion:
The suggestion is rejected because it is contrary to the going
concern concept. The vehicle should be recorded at the value of
RM20,000 and must be depreciated for 10 years because the
business must be assumed to continue for a long time
(foreseeable future).
18
Consistency
• Consistency means that a company uses the same
accounting principles and methods from year to year.
• When financial information has been reported on a
consistent basis, the financial statements allow
meaningful analysis of trends within a company over a
period of time.
Example:
The company uses a straight line method in depreciating
the fixed asset of the company. The company decides to
change to declining balance method.
Conclusion:
It does not comply with consistency concept because
the method should be used from year to year. Any
changes should be disclosed in the notes to the
19
Accounting Period
• Time period covered by financial statements is known
as accounting period.
• Time period assumption means business activities can
be divided into specific period such as a month, a
quarter and a year in order to enable comparison of
business performance over time.
Example:
The company established on 1 January 2022. The trade
closes the business account every 12 months at 31
December every year. Explain the concept involved.
Conclusion:
It is a normal condition when the business follows the
accounting period where the financial statements will be
issued every 12 months.
20
Materiality
● Materiality relates to an item’s impact on a firm’s overall
financial condition and operations.
● An item is material when it is likely to influence the
decision of a reasonably prudent investor or creditor.
● To determine the materiality of an amount, the
accountant usually compares it with such items as total
assets, total liabilities and net income.
Example:
A company purchases a calculator at cost RM20 and it will
depreciate for 5 years over its useful life. Give your opinion.
Conclusion:
Although the proper accounting would depreciate the calculator
over its useful life, but this cost is considered immaterial. It will
not make a material difference on total assets and net income.
Therefore, the cost of the calculator is best declared as supplies
(current asset) rather than an equipment (fixed asset).
21
Revenue Recognition
• Revenue is recognized in the period they are earned.
• When the merchandise has arrived to the buyer or when
services are rendered although cash has not been received.
• Criteria to recognize a revenue: -
• there is a change of ownership/title.
• buyers are willing to pay.
• the stability of the currency.
• buyers are able to pay.
• Example:
Mr. Tan is an entrepreneur of pottery. He has received 100
reservations for the porcelain vase on June 1, 2022 and has
received a payment of RM1,000. The booking was sent on June
15, 2022. When will the sales above be recognised? Give your
opinion.
• Solution:
Mr. Tan needs to recognise sales revenue of RM1,000 on 15
June 2022 because the change of ownership happens on that day.
22
Expense Recognition
• Expenses are recorded in the accounting period in
which it has been involved for a business revenue.
• Expenses are recognized when they are incurred
even if payment has not yet been made.
• The goal - to find out the actual amount of revenue
and expenditure for a financial period.
• Example:
Puan Salina has recorded expenses of RM2,000 for
the utility in April 2022, although payment will only be
made in May 2022.
Explanation:
Puan Salina complies with the concept of expense recognition
as an expense of the current period should be recorded in the
current accounting period (regardless of whether it has been
paid or not).
23
Full Disclosure
• The company should report the sufficient information
(ie: relevant, reliable, comparable) so that the external
parties can make a reasonable decision.
• Example:
Anita Business has made changes in stock valuation
method used. The company did not disclose the information
in the financial statements for the accounting period.
• Solution:
The situation does not comply with the concept of full disclosure
where a change made should be reported in the notes to the
accounts. The aim is to inform the user of changes in the
24
Notes to the accounts are
the additional information
and explanations that
accompany the financial
statements.
They provide more details

and clarity about the items,
amounts, and transactions
reported
Objectivity
• All accounting data should be valid and has reliable
evidence to support transactions occurred.
• The goal - to prevent accountants in giving subjective and
inaccurate opinion.
• Example:
Bertam Indah Co. issues only receipt for cash transactions, but
for the return of goods from sales transactions, no source
document is issued. Give your opinion.
• Solution:
The Company does not comply with the concept of objectivity for
the return of goods from sales transactions. For all transactions
occurred which needs to be confirmed with the release of the
source document. In addition to the evidence it can also facilitate
the recording.
26
Prudence
● The exercise of caution when making judgements
under conditions of uncertainty.
● The exercise of prudence means that assets and

income are not overstated and liabilities and
expenses are not understated. Equally, the
exercise of prudence does not allow for the
understatement of assets or income or the
overstatement of liabilities or expenses.
MASB, the Conceptual Framework for Financial Reporting (the Conceptual Framework), para. 2.16.
Prudence
● Example:
Inventory is recorded at the lower of cost or net
realisable value (NRV) rather than the expected selling
price.
(net realizable value = selling price - cost to sell)
● Solution:
This situation does comply with the prudence concept.
According to MFRS 102, Inventories shall be
measured at the lower of cost and net realisable
value.
● This would ensure inventory is not being overvalued, as
the figure of inventory directly impacts the “costs of
goods sold” figure, because “Cost of goods sold =
Beginning inventory + Purchases costs– Ending
inventory.”
Prudence
● Extra Example:
There is a “provision/allowance for doubtful debts” which is

reported in the section of current assets and is deducted from
accounts receivables in the Statement of FInancial Position.
● This provision doesn’t show the debtors that have resulted a

bad debts; instead, it shows the debtors that may end up as
bad debts based on their trading history with the company or
their specific circumstances. Ultimately, the company may not
recover money from these debtors. Provision/allowance for
doubtful debts demonstrates the application the prudence
concept in accounting.
● FAIR VALUE MEASUREMENT states that assets and liabilities should
be reported at fair value when it come to the point of selling assets or
settling liabilities.
● Fair Value is defined as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
● In determining which measurement principle to use, companies weigh

the factual nature of cost figures versus the relevance of fair value. In
general, most companies choose to use cost.
● Only in situations where assets are actively traded, such as investment

securities, do companies apply the fair value principle extensively.
● Example:
Certain investment securities are reported at fair value
rather than the purchase price.
● Solution:
This business complies with the fair value
measurement concept. This is because market price
information is usually readily available for these types
of assets. Only in situations where assets are actively
traded, such as investment securities, companies will
apply the fair value measurement concept extensively.
Owner’s
Owner’s
Brown, 2019.
https://www.double-entry-bookkeeping.com/accounting-equation/the-accounting-equation/
Owner’s
Owner’s
Owner’s equity can be expanded into:
Capital
+ Revenues _ Expenses _ Drawing /
Withdrawal
Brown, 2019.
https://www.double-entry-bookkeeping.com/accounting-equation/the-accounting-equation/
Assets
❖ Wealth / resources owned by the business.
❖ Assets are divided into two: -

1. Non-Current Assets
▪ Assets that have a life of more than one year.
▪ Divided into three: -
i. Tangible/fixed assets - can be seen physically.
Example: Buildings, Vehicles, Equipment
ii. Intangible assets – cannot be seen physically.
Example: Trademarks, Patents, Copyrights
iii. Long-term investments - fixed deposits for
more than a year, the purchase of bonds.
34
Assets
2. Current Assets
▪ Exist in one accounting period and can be
converted into cash within a year.
▪ Constantly of changing form and value.
▪ Example:
Inventory, Accounts Receivable, Bank, Cash,
Prepaid Expenses, Accrued Revenue etc.
35
Liabilities
❖ Debt / businesses obligation to be paid by

business entity to another party.
❖ Liabilities are divided into 2 types: -

1. Non-Current Liabilities
▪ Debt to be settled within a period
exceeding one year.
▪ Example: Long-term Loans, Mortgage
36
Liabilities
2. Current Liabilities
● Debt due in less than a year.
● Example:
Accounts Payable, Expenses Payable,
Unearned Revenue etc.
37
Owner’s Equity
Owner’s claims on the business.

They include:
❖ Capital invested by the owner into the
business.
❖ The net profit from the business activities.
38
The elements involved in
Owner’s Equity:
❖ Capital
▪ Consists of assets in the business by the
owners.
▪ Impact: increase the owner's equity.
❖ Drawings / Withdrawals
▪ Owner issues asset (cash/merchandise/fixed
assets) for his personal use.
▪ Impact:reduce the owners' equity.
❖ Expenses
❑ This will reduce the owner's equity.
▪ Income / Revenues
❑ This will add value to the owner's equity.
39
Owner’s Equity:
❖ Expenses
● Cost incurred in the course of operating a business.
● It is based on expense recognition concept.
● Impact: reduce the owners' equity.
● 2 types of Expenses:
✔Operating Expenses
Example: Utilities , sales commissions, delivery expense
✔Non-Operating Expenses
Example: Interest expense, property taxes on the
administrative office building
40
Owner’s Equity:
❖ Revenues
● Income generated from the sale of goods or services to
customers.
● It is based on revenue recognition concept.
● Impact: increase the owner's' equity.
● 2 types of revenues:
● Operating Revenue (derived from business main
activities)
Example: Sales, service revenue
● Non-Operating Revenue (derived from non-core activity)
Example: Interest income, rental income, gains on
disposal of fixed asset
41
Chart of accounts
Refer to pg. 5
https://drive.google.com/drive/folders/1iJ3apcF6pLdYxSyi-bg_-YFUUL3NHtE6
42
Analysis of Transactions
● The accounting equation shows how assets,
liabilities and owner’s equity are related.
● Assets appear on the left side of the equation, and

the liabilities and owner’s equity appear on the right
side.
● The accounting equation must remain in balance

after each transaction.
43
Analysis of Transactions
44
Accounting uses the double-entry

system, which means that we
record the dual effects of each
transaction. As a result, every
transaction affects at least two
accounts. It would be incomplete to
record only the giving side, or only
the receiving side, of a transaction.
45
DEBIT = The left side of the account

CREDIT = The right side of the account
The following T-account:
Dr. Title of Account Cr.

DEBIT CREDIT
46
Rules of Debit and Credit

Balance b/f = beginning balance
baki awal/baki akaun pada awal
bulan
Normal Balance b/f Increase Decrease
Assets Debit Debit Credit
Liabilities Credit Credit Debit
Owner's equity Credit Credit Debit
Revenue - Credit Debit
Expenses - Debit Credit
* Contra to xx Debit & Credit terbalik dengan xx
47
EXTRA NOTES
1. Transaction Analysis
J. Scott, the owner, contributed $20,000

cash to start the business.
The accounts involved are:

(1) Cash (asset)
(2) J. Scott, Capital (equity)
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Transaction Analysis
J. Scott, the owner, contributed $20,000
cash to start the business.
Purchased supplies paying $1,000
cash.
(1) Cash (asset)
(2) Supplies (asset)
Purchased supplies paying $1,000
cash.
Purchased equipment for $15,000
cash.

(1) Cash (asset)
(2) Equipment (asset)
Purchased equipment for $15,000
cash.
Purchased Supplies of $200 and
Equipment of $1,000 on account.
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)
Purchased Supplies of $200 and
Equipment of $1,000 on account.
Borrowed $4,000 from 1st American
Bank.
(1) Cash (asset)
(2) Notes payable (liability)
Borrowed $4,000 from 1st American
Bank.
The balances so far appear below. Note that the SOFP
Equation is still in balance.
Now let’s look at transactions involving

revenue, expenses and withdrawals. © The McGraw-Hill Companies, Inc., 2007
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana
Rendered consulting services
receiving $3,000 cash.

(1) Cash (asset)
(2) Revenues (equity)
Rendered consulting services
receiving $3,000 cash.
Paid salaries of $800 to employees.

(1) Cash (asset)
(2) Salaries expense (equity)
Remember that the balance in the salaries
expense account actually increases.
But, equity actually decreases because expenses
reduce equity.
Paid salaries of $800 to employees.
Remember that expenses decrease equity.

J. Scott withdrew $500 from the
business for personal use.
(1) Cash (asset)
(2) J. Scott, Withdrawals (equity)
Remember that the balance in the J. Scott,
Withdrawals account actually increases.
But, equity actually decreases because
withdrawals reduce equity.
J. Scott withdrew $500 from the
business for personal use.
Remember that withdrawals decrease equity.

Financial Statements
1. Statement of Comprehensive
Income/ Profit or Loss
2. Statement of Owner’s Equity
3. Statement of Financial Position
4. Statement of Cash Flows
Profit is the
difference
between
Revenues and
Expenses.
The Statement of Profit or Loss

(SOPL) describes a company’s
revenues and expenses along with
the resulting profit or loss over a
period of time due to earnings
activities.
The profit of
$2,200
increases
Scott’s capital
by $2,200.
The Statement of
Owner’s Equity
explains changes in
equity from profit (or
loss) and from owner
investments and
withdrawals for a
period of time.
The Statement
of Financial
Position
(SOFP)
describes a
company’s
financial
position at a
point in time.
Owner’s Equity in Balance Sheet
From Statement of Owner’s Equity
The Statement of Cash Flows identifies cash inflows and cash outflows over a
period of time.

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Program Matrikulasi Satu Tahun Perakaunan

2.1 Financial Reporting Framework in Malaysia

2.2 Accounting Concepts

2.3 Accounting Equation

2.4 Double-Entry System

• The financial reporting framework (rangka)

• Malaysian Accounting Standard Board (MASB) has adopted

•GAAP is a set of accounting principles, procedures and guidelines used by

• ultimate goal : to ensure a company's financial statements are accurate,

• solve different opinions between the accountants.

The difference in accounting framework among Generally Accepted

• In Malaysia, private sector entities prepare their financial statements based on

• fully compliant with the International Financial Reporting Standards (IFRS)

• MFRSs are based on the Conceptual Framework for Financial Reporting,

• The accountancy profession in Malaysia is governed by the Malaysian

• Other regulatory bodies/ regulations include:

Monetary Measurement Accounting Period

Revenue Recognition Historical Cost

Expense Recognition Full Disclosure

Only record a revenue transaction or an asset when it is certain, and

Fair Value Measurement

Expressing transactions and events in monetary units is crucial

● The business and its’ owner are two different entities.

● The activities of the business must be kept separated and

● The entity needs to be evaluated separately from the

They provide more details

● The exercise of prudence means that assets and

There is a “provision/allowance for doubtful debts” which is

● This provision doesn’t show the debtors that have resulted a

● In determining which measurement principle to use, companies weigh

● Only in situations where assets are actively traded, such as investment

Owner’s equity can be expanded into:

❖ Assets are divided into two: -

❖ Debt / businesses obligation to be paid by

❖ Liabilities are divided into 2 types: -

● Debt due in less than a year.

Owner’s claims on the business.

● Assets appear on the left side of the equation, and

● The accounting equation must remain in balance

Accounting uses the double-entry

DEBIT = The left side of the account

The following T-account:

Dr. Title of Account Cr.

Rules of Debit and Credit

J. Scott, the owner, contributed $20,000

The accounts involved are:

The accounts involved are:

Now let’s look at transactions involving

The accounts involved are:

The accounts involved are:

Remember that expenses decrease equity.

Remember that withdrawals decrease equity.

The Statement of Profit or Loss

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