Accounting Principles Overview

Accounting Principles

• Accrual Principle: Financial transactions are recorded when they occur, not when cash changes hands. This means revenue is recognized when earned and expenses are recognized when incurred, regardless of cash flow.

• Revenue Recognition Principle: Revenue is recognized when it's earned, not when payment is received. If goods are delivered in December but payment is received in January, the revenue is recorded in December.

• Matching Principle: Expenses are recorded in the same period as the revenues they help generate. This ensures a proper match between income and related costs. For example, if goods are sold in December, the cost of those goods should also be recorded in December.

• Historical Cost Principle: Assets are recorded at their original cost, not their market value. This provides a reliable and verifiable record of transactions. If a building is bought for RM500,000, it's recorded at that cost, even if the market value changes later.

• Full Disclosure Principle: All relevant financial information must be disclosed, including any additional details that impact financial data. This includes details like lawsuits, even if the lawsuit hasn't yet affected financial figures.

• Materiality Principle: Information is material if its omission could influence decisions. Only significant items are disclosed. Small expenses that don't impact decision-making might be ignored, while significant expenses must be reported.

Accounting Assumptions

• Separate Business Entity: A business is treated as separate from its owners or other businesses. Financial transactions are recorded separately from personal or organizational transactions.

• Monetary Unit: Financial transactions are recorded in a stable currency. This assumption ignores the effects of inflation or deflation. Transactions not measurable in monetary units aren't recorded.

• Time Period: Reports are prepared for specific periods, like monthly, quarterly, or annually, to allow for timely reporting and analysis of financial performance

• Going Concern: The business is expected to continue operating in the foreseeable future. This allows the deferral of recognizing certain expenses and revenues until future periods.

Accounting Standards

• International Financial Reporting Standards (IFRS): Issued by the IASB, IFRS promotes global harmonization of financial reporting making it easier for investors to compare statements across borders. IFRS is widely used across 140+ countries, including Malaysia . It's a principle-based standard.

• Generally Accepted Accounting Principles (GAAP): Based in the US, GAAP sets accounting standards which are issued by the Financial Accounting Standards Board (FASB). GAAP is a rule-based standard, and there are ongoing efforts to converge US GAAP with IFRS to create a unified, global accounting framework.

• Malaysian Financial Reporting Standards (MFRS): Based on IFRS, MFRS governs financial statement preparation in Malaysia. The Malaysian Accounting Standards Board (MASB) is responsible for issuing these standards.

Ethical Standards

• Code of Ethics: Accounting bodies uphold ethical practices within the profession. The code of ethics sets principles that guide professional behavior by ensuring that accountants act with integrity, objectivity, and professionalism. The importance of ethics is especially critical given the financial crises and corporate scandals.

Accounting Bodies

• Global:

  • International Federation of Accountants (IFAC): Prompts international convergence of standards, backs professional organizations, and highlights sustainability and ethical practices.

  • International Accounting Standards Board (IASB): Establishes global accounting standards for financial reporting and aims for transparency and comparability across borders.

• Regional & National (Examples):

  • Malaysian Institute of Accountants (MIA): A statutory body that regulates the accounting profession in Malaysia. It ensures compliance with local laws, and develops ethical/professional standards for accountants. MIA membership is required for accountants to practice in Malaysia.

  • Association of Chartered Certified Accountants (ACCA): A global professional body focusing on providing the ACCA qualification, with emphasis on both management and financial accounting expertise, and promoting international career mobility.

  • Institute of Chartered Accountants in England & Wales (ICAEW): One of the oldest accounting bodies worldwide(established in 1880) it offers the ACA qualification, and supports ongoing member development. They provide seminars, conferences and courses which focus on financial reporting, auditing, assurance and advisory services.