...Basic assumptions of accounting Going concern assumption proposes that the financial statements are normally prepared on the assumption that an entity will continue its operations in the foreseeable future. If this is not applicable the financial statements needs to be revised and assets and liabilities should be measured at their current net realizable value. Additional disclosures about the basis of preparation must be made in the financial statements. Accounting entity or business entity assumption states that the business is considered separate and distinct from its owners. Accounts are kept for entities, as distinguished from the persons associated with these entities. For example the purchase of an asset for owner’s personal use should not be recorded in financial statements. This ensures transparency in ascertaining the return on capital employed. Money Measurement specifies that only items which are capable of being measured in monetary terms should be recognized in the financial statements. For example even though a loyal workforce may be of benefit to a business this value cannot be measured in monetary terms and is therefore not included on the balance sheet. It also assumes stability in the time value of money. E.g. $1 a year from now will buy the same amount as it does today. Accounting period assumption dictates that the financial statements should be prepared and reported for a specified time period (generally a year). At the end of each accounting period...
Words: 672 - Pages: 3
...Accounting Assumptions, Principles, and Constraints | XACC 280 | Amy Croall | The Financial Accounting Standards Board (FASB) has expounded policies named the Generally Accepted Accounting Principles (GAAP). The rules were recognized to make monetary reports or “fiscal statements” beneficial to users. All monetary reports must cover comparable features so making choices is simpler. The features are “relevance, reliability, comparability and consistency” (Weygandt, Kimmel, & Kieso, 2008). These features are directed by “accounting assumptions, principles and constraints”. The assumptions or suppositions are founding elements of the procedure of accounting. For instance, the “monetary unit assumption” stipulates that solely trades or frugal dealings which can be articulated in a fiscal denomination will be recognized. This is known as relevance. The “time period assumption” stipulates that the trade data be divided into periods of time, much like monthly or quarterly. This is known as “consistency and reliability” (Weygandt, Kimmel, & Kieso, 2008). These are simply two instances of assumptions; however, there is the “economic entity assumption” and the “going concern assumption”. Each of these assists in developing monetary reports, and assists in meeting the required features. The regulations develop rules for documenting information for the purposes of bookkeeping. The “revenue recognition principle” stipulates that income must be documented in the period...
Words: 362 - Pages: 2
...ACCOUNTING ASSUMTIONS, PRINCIPLES AND CONSTRAINTS Financial accounting provides a business with information that will help guide the company. Financial accounting will record the businesses financial transactions. In order to do this, they have to go by standardized guidelines, in which transactions are recorded, summarized and put into a financial report or statement. The standardized guidelines are called generally accepted accounting principles (GAAP), which means that these principles and guidelines have “substantial authoritative support.” This support comes from two standard-setting bodies: the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) (Weygandt, Kimmel & Kieso, 2008), which will be discussed more in details later. Accounting Guidelines Accounting requires one to handle many practical financial issues, which requires them to need more detailed guidelines. This is why the FASB is needed, to help implement operating guidelines. These guidelines are classified as assumptions, principles and constraints. Assumptions provide a foundation for the accounting process. * Monetary unit assumption states that only transaction data that can be expressed in terms of money be included in the accounting records. * Economic entity assumption states that the activities of the entity be kept separate and distinct from the activities of the owner and of all other economic entities. * Time period...
Words: 532 - Pages: 3
...The objective of this individual assignment is to understand the relationship between accounting assumption, principles and how does they assist in financial reporting. It is also to understand what types of accounting theory that relevant with the accounting principles. Going concern assumption is one of accounting assumptions which is about financial activities of a business are assumed to be in operation for long period of time. This assumption is allows a business to operate in long term view. This assumption is very critical where there is no short term end of point. (Simple studies, 2010). Full disclosure principle is one of accounting principles that constitute with going concern assumption. The principle is about all past, present and future information that may have made an impact on the financial performance of the company needs to be fully disclosed. Even though the historical performance of company is readily available, but the numbers does not always provide the entire picture of company. Full disclosure of information is need because it is reflect the economic condition of company. This principle is also important in order to assist decision maker to make decision. (Simple studies, 2010). In this condition where full disclosure principle is coherent with going concern assumption can be relate with accounting rule FRS136, which is about impairment of assets. This standard is to ensure the values of assets are disclosed in the balance sheet, where the carrying...
Words: 934 - Pages: 4
...Accounting Concepts, Assumptions, Principles, Elements Key Things to Know Objectives of Financial Reporting: 1. Provide useful information to investors and creditors for decision making (assume users have a “reasonable understanding” of business). 2. Provide information to access the amounts, timing, and uncertainty of cash inflows and outflows. 3. Provide information about resources (assets) and claims to resources (liabilities). Recognition: An item should be recognized in the financial statements when it meets all 4 of the following criteria: 1. Definition: meets the definition of an element 2. Measurability: measurable with sufficient reliability 3. Relevance: makes a difference in the decision 4. Reliability – representationally faithful, verifiable, neutral Accounting Underlying Assumptions - Basis for Generally Accepted Accounting Principles (GAAP) Entity Assumption - each business is its own “accounting” entity. Periodicity Assumption - divide economic activities into time periods for reporting. Going Concern Assumption - the company will remain in business and will...
Words: 1011 - Pages: 5
...Checkpoint 1: Accounting assumptions, principles, constraints Accounting Assumptions, Principles, and constraints The basic Assumptions of accounting are: monetary unit assumption, time period assumption, economic entity assumption, and going concern assumption. Monetary unit assumption is when records only show data that can be expressed in terms of money. Health of owners, the quality of service, and morale of employees are not included because companies cannot qualify this information in terms of money (Accounting in action). Going concern assumption is when the business is assumed to have a continuous life of existence it will not close or be sold. Since the business is assumed to have a continues life of existence the life of the business is divided into equal periods that when these equal periods are over the accountant prepares the financial statement, this called the time period assumption. this period can be yearly, annually, monthly or quarterly it depends. and finally entity assumption wherein the business considered as a separate and distinct entity apart from the owner. The principles of accounting: the first principles is the cost principle, this dictate the company's assets at their cost. This means the amount spent when the item was obtained whether it was purchased today or 20 years ago. Cost will be recorded as purchased even if the cost has had increase in value over time, this is referred to as historical cost. This basic accounting principle is the...
Words: 483 - Pages: 2
...Early Accounting * Accountancy has its roots in the earliest history of civilization. With the rise of agriculture and trade, people needed a way to keep track of their goods and of transactions. Around 7500 B.C., Mesopotamians began using clay tokens to represent goods, such as animals, tools, food items or units of grain. This helped owners keep track of their property. Instead of counting heads of cattle or bushels of grain every time one was consumed or traded, people could simply add or subtract tokens. Different shapes were used for different goods. Around 4000 B.C., the Sumerians began placing these tokens in sealed clay envelopes. Each token would be stamped into the clay of the outside of the envelope, so the owner would know how many tokens were inside, but the tokens themselves would be kept safe from tampering or loss. This practice of pressing the tokens into the clay may have been the earliest genesis of writing. A few hundred years later, more complex tokens began to be used. These tokens had special markings to denote different units or types of goods. Starting around 3000 B.C., the Chinese developed the abacus, a tool for counting and calculating. * Basic principle Revenue principle The revenue principle, also known as the realization principle, states that revenue is earned when the sale is made, which is typically when goods or services are provided. A key component of the revenue principle, when it comes to the sale of goods, is that revenue is...
Words: 2073 - Pages: 9
...Basis Accounting: Under the accrual basis accounting, business transactions specifically those relating to income and expenses are recognized and recorded in the books the moment the substance of the transaction has been perfected. Generally Accepted Accounting Principles (GAAP) prefers that financial statements are based entirely on the accrual basis accounting instead of the cash basis accounting. In its simplest terms, the accrual basis accounting assumes that income is recognized when earned regardless of the date of payment. On the other hand, expenses are recorded when incurred regardless of whether it was paid in cash or in credit terms. Going Concern Assumption: Every financial statement reports a business firm’s capacity and performance based on the understanding that the business will continue its operations indefinitely – except if there is evidence that the business firm will close its operations in the near future. A business firm whose status is going concern reports assets based on their historical value. Similarly, assets carry a book value equivalent to the difference between their historical value and accumulated depreciation. Under this assumption, market values are ignored as the business firm will continue operating indefinitely. Accounting Entity Assumption: Basically, the accounting entity assumption is the same as the business entity principle. In this system, a business firm is considered a separate and distinct entity from its owner. The accounting entity...
Words: 1239 - Pages: 5
...Accounting is a system of recording processing business event and communicating information about a business to: * The business owner or owners * People who may want to invest in the business * Creditors, that is, people we owe money to * Others, including employees. Accounting information is given in the form of accounting reports, including the Income statement (has the business made a profit or a loss for a year?) and balance sheet (what are the resources of a business, such as, land? How much money does the business owe to creditors, such as, a bank? How much money does the business owe to the owner?). Accounting Is practical subject that is supported by theory. Before we examine the practical aspects of accounting we need to look at the theory structure of accounting. Accounting theory in Australia consists of * Accounting assumptions * Accounting principles * Australian Accounting Standards Board (AASB) accounting standards, and * The conceptual framework of accounting. Accounting Assumptions Are a set of beliefs that accountants have about how an accounting system works. * Accounting Entity Principle * Monetary Assumption * Historical Cost Principle * Accounting Period Assumption * Going Concern Assumption * Materiality Example 1 Accounting period Assumption It is assumed that the life of a business can be divided into intervals of time known as accounting periods. Period 1 ...
Words: 495 - Pages: 2
...Accounting Assumptions, Principles, and Constraints XACC 280 It can be said that when dealing with all aspects of accounting one would have their own assumptions of what exactly accounting can be interpreted to be. Along with assumptions, there are certain principles and constraints that are established in the accounting field. A clear explanation of principles, assumptions, and constraints can be done. The assumptions in accounting are first the monetary unit assumption which is the requirement of companies to express transaction data in accounting records in terms of money. Economic entity assumption is the requirement of each entity activities is separated from the activities of the owner and other economic entities. The cost principle is one of the principles of accounting which delegates the business asset information on their own cost for the time it is purchased and for the time it can be held. GAAP (generally accepted accounting principle) is another principle that shows how to give information on the economic events indicated. There are other principles like International and Financial Accounting Standard Board, and Securities and Exchange Commission. To ensure sound financial reporting the purpose of using the principle in the correct way, like the GAAP can help companies accounting stay intact and will also keep information clear and recorded along with the constraints of knowing what can or cannot be done in the company’s accounting. These choices will differ...
Words: 275 - Pages: 2
...Accounting Assumptions, Principles & Constraints Greg Young XACC/280 03/10/2013 Salena Ford Accounting assumptions provide a foundation for the accounting process. There are three major assumptions; the monetary unit, economic entity, and time period assumptions. The fourth assumption is the going concern assumption. The Monetary Unit Assumption makes it mandatory that only transaction data that can be expressed in terms of money be included in the accounting records. The reason for this is so that a company does not put a dollar value on something that cannot be expressed easily, such as the president of a company. The Economic Entity Assumption states that the activities of an entity be kept separate and distinct from the activities of the owner and of all other economic entities. An example of this would be the assumption that the activities of Budweiser are different from other breweries such as Coors or Guinness. The Time Period Assumption states that the economic life of a business can be divided into artificial time periods. This assumption is stating that companies are able to divide their activities in months or quarters for financial reporting purposes. The Going Concern Assumption assumes that a company will continue to operate long enough to complete their existing objectives. Accounting principles area basically a guideline on how to properly record and report economic events. The revenue recognition principle dictates that companies should...
Words: 514 - Pages: 3
...Kaitlin Williams University of Phoenix ACC/280-Principles of Accounting Carol Demuth Jun 22, 2011 Financial Statement Paper Businesses today need to run quickly, efficiently, and have smaller margin for error than ever before. To keep up with the fast paced world around them, companies must assure things run as smoothly as possible to have a chance at competing with their competitors. One of the biggest details that have to be correct is the company’s accounting. Getting the numbers right isn’t just important, it’s the reason that a business can make money. Without proper accounting, it would not be possible to know how much money is being made or lost, what can be done to change these things for the better, or even where the money ends up. It is a part of everyday business, and will be as long as people continue to do business. Accounting is utilized to record all of the receiving, sending, and all other transfers of money for a particular company. Think of it like the balancing of a checkbook for an entire business as opposed to a personal bank account. If transactions are not kept up with, money can easily fall through the cracks and companies could lose a substantial amount of it simply by not knowing what the numbers should look like. It would be impossible to know if someone was stealing money from the company, or if a company that business was done with had actually paid its bill correctly. Accounting is more than a necessity, it is impossible to run a business...
Words: 914 - Pages: 4
...There are four basic assumptions in financial accounting. The first is the monetary unit assumption which states that a company can only report transaction information in financial records that can be expressed in a monetary amount. The next assumption is the economic entity assumption. This assumption states that the company’s financial information and activities need to be recorded separate from the owners and other entities. Next, the time period assumption tells companies to divide the economic life of their business into artificial time periods. And last, the going concern assumptions is an assumption that a company will stay afloat long enough to carry out all existing objectives (Weygandt, Kimmel, Kieso, 2008). Financial accounting also consists of 4 principles; revenue recognition, matching, full disclosure, and the cost principle. These principles are “rules” of sorts that accounting must follow in their records. They state that companies should recognize their revenue during the time period that it was earned, they must match their expenses with their revenues during the period in which the effort to generate the revenue was made, they must disclose any circumstance or events that would make a difference to those using the reports, and they must record their assets at the price that it cost them (Weygandt, Kimmel, Kieso, 2008). There are also constraints that allow the company some leeway with the principles as long as it does not affect the usefulness of the data...
Words: 399 - Pages: 2
...Concepts of Accounting Meaning • Accounting is often called the language of business since people in the business world such as owners, managers, bankers all use accounting terms. • Accounting is defined as the art of recording, classifying, summarizing, analyzing, interpreting and communicating the results of transactions and events which are of financial character. • The person in charge of accounting is known as an accountant, and this individual is typically required to follow a set of rules and regulations. • Accounting allows a company to analyze the financial performance of the business, and look at statistics such as net profit. Elements of Accounting If complete records are to be maintained, all transactions and operations that affect the accounting elements must be recorded. The elements of accounting are- Assets Liability Owner’s equity or proprietorship The relationship among three of these elements of a business can be expressed in the form of simple equation. That is, • Asset= Liability+ Owner’s equity. • Balance sheet is a detailed statement of this equation. It means that it is a basic principle of accounting that the total of the assets of all types is equal to the sum of the liabilities and proprietorship. Asset: An asset is something (a resource) that the company currently owns and uses to get the business functioning. An asset can be an item without which the company would not operate. For example, for a ...
Words: 454 - Pages: 2
...A. Accounting Assumptions= Assumption#1. Accounting Entity-A company is considered a separate “living” enterprise, apart from its owners. In other words, a corporation is a “fictional” being: / It has a name. / It has a birthdate and birthplace (referred to as incorporation date and place, respectively). / It is engaged in clearly defined activities. / It regularly reports its financial health (through financial reports) to the general public. / It pays taxes. / It can file lawsuits. Why Assume “Accounting Entity”? /It Provides Context. The accounting entity assumption enables users of financial reports to tell whose financials they are reviewing and therefore places those financials into context. /It Promotes Ownership. The assumption of a company as a separate economic entity promotes ownership in the business, since its current and future owners know that their financial liability is limited to the value of their investment while they are legally shielded from any potential lawsuits brought against the company. Assumption#2. Going Concern- A company is considered viable and a “going concern” for the foreseeable future. In other words, a corporation is assumed to remain in existence for an indefinitely long time. Exxon Mobil, for example, has existed since 1882, and General Electric has been around since 1892; both of these companies...
Words: 1991 - Pages: 8
