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INTRODUCTION TO ACCOUNTING 

 Accounting Concepts & Equation

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Learning Objectives

� Identify the users of accounting information

� Provide an overview to the accounting process

� Understand the conceptual framework and basic 

concepts of accounting

� Overview to assets, liabilities, revenue and expenses

� Understand the accounting equation.

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Users of Accounting Information

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 ACCOUNTING CONCEPTS 

 Accounting is a service  provided for those who

need  information about an entity¶s financial 

 performance, its assets and liabilities.

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Service

Provide useful data to other people

Information Quantitative monetary terms (P&L,

Balance Sheet, C/Flow, Statement of Shareholder¶sEquity)

Entity 

Organization or individual 

Financial performance Profit or Loss

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Boundary Rule ± Entity Concept 

Separation of owner¶s private and business

affairs

Owner¶s Private Affairs

- Property 

- Investments

- Loans

- Cash & Bank  Accounts

- Amounts owing

Owner¶s Business Affairs

- Property 

- Investments

- Loans

- Cash & Bank Accounts- Amounts owing

Capital 

 Profits

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Boundary Rule

 Accounting Period  Interval or time period for reporting

Common intervals:

- Yearly  

- Monthly  

- Quarterly  

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Boundary RuleBoundary Rule ± ± Going ConcernGoing Concern

Entity will continue in existence for the

foreseeable future

Boundary RuleBoundary Rule ± ± QuantitativeQuantitative

Only items that are able to be measured are recorded.

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Measurement Rule - Monetary 

Common recognizable measure.

Objective measurement 

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Measurement Rule

Historical Cost  Recorded at original cost 

Original cost � Market Value

Ignore inflation

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Measurement Rule

Realization In strictest sense Cash flow accounting

Recognize sale only when cash is received  OR 

when ³reasonably confident/certain´ to doso

Recognize expenses when they are paid 

May produce misleading results

Example Bad debts

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Measurement Rule

Realization� In general, realized value is amount of cash that 

could be obtained from an asset in an orderly 

disposal.

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Measurement Rule

Matching principle  Accrual accounting

³Non cash effects´ 

Record income as it is earned 

Record expenses when they are incurred 

Need to match all income earned and expenses

incurred during a specific time period 

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Measurement Rule

Matching principle (cont/«)  Accrual/Provisions

- Amount owed during a time period that has

not been paid.- May involve estimates

Prepayment  Amount paid in advance for goods and/or services

that have not been delivered.

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INCOME 

EXPENSES

For this periodFor previous

 period

For current period

Cash

Received

CashPaid

Amount

receivable

Credit 

 sales

Previous

Amount

receivable

 PreviousCredit 

 sales

Amount

Owing Payables

Amount

owing Previous

 Payables

+

+

-

-

minus

equals

 Profit/Loss

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Measurement Rules

Dual Aspects Double entry book-keeping

 Assets = Liabilities + Equity 

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Measurement Rules

Materiality  Record significant items

Small items can be ignored 

Practical but subjective

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Ethical Rules

Relevance Useful ± influences decisions

Timely reporting

Confirms and/or help predictions

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Ethical Rules

Conservatism/Prudence ± Due caution given to uncertain

conditions.

(Revenue recorded when realized beyond reasonable doubt.

Expenses recorded as soon as they come into notice)

Consistency  ± Do not change the rules, assumptions and/or 

 principles

Objectivity  ± Evaluation should be made based on complete,

authourised/reliable and relevant information Not biased 

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Ethical Rules

Relevance  ± Enable the user to get a fair and  

³accurate´ view 

Integrity   ± Practice professionalism in expressing

opinion

Confidentiality   ± Do not disclose information to parties that are not privy to them

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Ethical Rules - Comparability 

� Consistently applied over time

� Should not change accounting method without good 

reason

� Disclosure of information (qualitative) to provide

meaningful explanations of accounting treatment you

have done.

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Ethical Rules - Understandability 

Capable of being understood by users:

Having a reasonable knowledge of business, economic and accounting

Willing to study with reasonable due diligence theinformation provided.