Acc117-Chapter 2

QUALITATIVE
CHARACTERISTICS OF
FINANCIAL INFORMATION
AND ACCOUNTING
CONCEPTS
BY:
SURYANI ABDUL RAMAN
FACULTY OF ACCOUNTANCY
UITM TAPAH
LEARNING OBJECTIVES
Students should be able to:

01 Explain the qualitative characteristics of useful
financial information
02
02
Explain the accounting assumptions and concepts
04
05
What are the qualitative characteristics of
financial information?
“ Qualitative characteristics of financial statements are

attributes that enhance the meaningfulness of
“
information provided in financial statements to their
users. It can be sub-divided into fundamental
characteristic and enhancing characteristics
Qualitative Characteristics of Useful
Financial Information
Fundamental Characteristics
The information is relevant if it can
influence the economic decisions of
users by helping them evaluate past,
RELEVANCE present or future events or confirming,
or correcting their past evaluations.
The information must be complete,

neutral, and free from material error. FAITHFULLY
REPRESENTATION
Enhancing Characteristics
The information can help users see
similarities and differences between
events and conditions and trends in
COMPARABILITY the financial position and
performance of the business
The information helps users to

understand the information within
the context of the decision being
made UNDERSTANDABILITY
Enhancing Characteristics
The information has consensus
among different measurers. If
information is verified, this provides
VERIFIABILITY assurance to the users that it is
both credible and reliable.
Information is timely when it is

available to users early enough to
allow them to use it in their decision
process. TIMELINESS
TAKE A BREAK
What is accounting concepts and principle?
“ Accounting principles or concepts refer to rules

that must be followed in the preparation of
“
financial statements to ensure subjectivity.
These concepts consists of conventions, bases
and policy consideration.
• Conventions are also called assumptions, which refer to general
understanding or generally accepted ideas, for example the
economic entity principle.
• While accounting base or basis is another important principle

Introduction that helps further in recording process. An example of
accounting basis is accrual basis.
• Finally, policy consideration deal with the adoption of a certain

accounting method or basis and the consistent
application of that method or basis, for example the use of
straight-line method in the calculation of depreciation
Accounting
Concepts
Economic entity/ Business Entity
Going Concern
Monetary/Money Measurement
Periodicity
Cost
Consistency
Accruals
Materiality
Neutrality
Comparability
Economic Entity / Business
Entity
 Definition:
 Thisconcept assumes that a business and its
owner(s) are two separate existence entity.
 Thus, the item recorded in the business’s books are
limited to transactions affecting the business only.
 The transactions or assets of its owner or another
business should not be included in the records of
the business.
12
Economic Entity / Business
Entity (cont.)
 Examples:
 The owner’s personal asset should not be included
in the asset’s account of the business.
 Rental paid for the owner’s house should be
excluded from the expenses account of the
business.
 However, any payments for the owner’s personal
expenses by the business will be treated as
drawings and reduced the owner’s capital
contribution in the business.
13
Going Concern
 Definition:
 This concept assumes that a business will
continue to operate in the foreseeable future and
will have a long life that will last long enough to
fulfill its objectives and commitments.
 Financial statements should be prepared on a
going concern basis unless management either
intends to liquidate the business or to cease its
trading.
14
Monetary/Money Measurement
 Definition:
 It assumes that the measurement unit used in
the transactions of business are recorded in
terms of money, e.g. ringgit Malaysia (RM)
 It
provides an appropriate basis for accounting
measurement and analysis
 Example:
 The sale of goods to customer should be
recorded in the amount of RM in the books of
business.
15
Periodicity
 Definition:
 It assumes that the economic activities of a
business can be divided into regular time
periods, namely monthly, quarterly or yearly.
 For reporting purposes, financial statements of
business are normally prepared on yearly basis.
 Example:
 The Statement of Profit or Loss of ABD
Enterprise is prepared for the year ended 31
December 20xx
16
Cost
 Definition:
 The concept requires that assets and services
plus any resulting liabilities be taken into the
accounting records at historical cost.
 Cost is used as:
 It is definite and determinable
 Accountants can provide objective and
verifiable data in their reports
 Costs are measured on a cash or cash
equivalents basis
17
Consistency
 Definition:
 Companies should choose the most suitable
accounting methods and treatments, and
consistently apply them in every period.
 Changes are permitted only when the new
method is considered better and can reflect
the true and fair view of the financial position
of the company.
18
Consistency (cont.)
 Examples
 Once a business has adopted the straight-line
method for calculating the depreciation, the
method should be used both within one
accounting period and from one accounting
period to another.
 It should not be changed to adopt reducing
balance method in other period.
 Ifa company adopts weight-average method as
stock valuation and should not be changed to
other method e.g. first-in-first-out method
19
Accruals or Matching
 Definition:
 Revenues are recognized when they are
earned, irrespective of whether the money has
been received or not.
 Expenses are recognized as they are incurred,
irrespective of whether the cash have been
paid or not.
 Following this, the profit for the period is
determined by subtracting expenses incurred
from revenues earned
20
Accruals or Matching (cont.)
 The objective of running a business is to earn

profit. In order to ascertain the profit made by the
business during a period, it is necessary that
‘revenues’ of the period should be matched with
the cost (expenses) of the period.
 Example
 Expenses incurred but not yet paid in current period should be
treated as accrual/accrued expenses under current liabilities
 Expenses incurred in the following period but paid for in
advance should be treated as prepayment expenses under
current asset
21
Materiality
 Definition:
 In accounting, an amount is considered
material if it has a significant effect upon the
profit or the financial position of a company.
 Immaterial amounts may be aggregated with
the amounts of a similar nature or function
and need not be presented separately.
 Materiality depends on the size and nature of
the item.
22
Materiality (cont.)
 Example
 Small payments such as postage,
stationery and cleaning expenses should
not be disclosed separately. They should
be grouped together as sundry expenses.
 The cost of small-valued assets such as
calculators and pencils should be written
off to the profit and loss account as
revenue expenditures, although they can
last for more than one accounting period.
23
Neutrality
 Definition:
 The concept assume that the information
presented must be free from bias to be
reliable.
 Neutrality will be lost if the financial
statements are prepared to influence the users
to make a judgement or decision in order to
achieve a predetermined outcome.
24
Comparability
 Definition:
- It assume that users must be able to
compare the business financial
statements through:
- different times to identify trends
- With another entity’s statement to
evaluate their relative financial positions,
performance and changes in financial
position
25
Thank you

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QUALITATIVE

Students should be able to:

“ Qualitative characteristics of financial statements are

The information must be complete,

The information helps users to

Information is timely when it is

“ Accounting principles or concepts refer to rules

• While accounting base or basis is another important principle

• Finally, policy consideration deal with the adoption of a certain

 The objective of running a business is to earn

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