5 accounting assumptions flashcards 6

Assumptions, Accounting Principles conceptual framework Flashcards by Maria S

That’s an assumption of the going concern that validates recording the deferred revenue, deferred expenses, prepaid, accruals, etc. So, if management concludes that they won’t be able to remain in the business, the accounting standards do not allow going concern assumptions. So, in this case, financial statements have to be prepared on a different basis, like a break-up basis. This article will look at GAAP accounting assumptions as they apply to agricultural production.

Assumptions, Accounting Principles (conceptual framework) Flashcards

It offers a systematic structure with respect to how the accounting transactions of an organization for a particular financial period must be recorded and reported in the financial statements. This assumption states that the accounting methods and practices that are used by an entity must be reported and maintained for a particular period of time. It is necessary for the companies to ensure that these periods remain consistent for each year so that it becomes easy for the readers of the financial statements to compare the same for different time periods. This assumption makes it substantial for the companies to use a consistent method of accounting for all the accounting periods.

Monetary Unit Assumption and its role in Financial Statements

• The application of the economic entity concept has significant importance because of the following reasons.
• For instance, a depreciable amount is charged in different periods based on the estimate.
• Undeniably, without a common monetary unit, making sense of various business transactions would be quite challenging.
• So, if management concludes that they won’t be able to remain in the business, the accounting standards do not allow going concern assumptions.

As a result of this principle, a company’s financial statements will include many disclosures and schedules in the notes to the financial statements. To report a company’s net income for each month, the company will prepare adjusting entries to record each month’s share of depreciation expense, property taxes, insurance, etc. Since 1973, US GAAP has been developed and maintained by the Financial Accounting Standards Board , a non-government, not-for-profit organization. Unless the Engineering Department provides compelling evidence to support its estimate, the company’s accountant must follow the principle of conservatism and plan for a three‐percent return rate. Losses and costs—such as warranty repairs—are recorded when they are probable and reasonably estimated.

Monetary Unit Assumption in Accounting

The International Accounting Standards Board issues International Financial Reporting Standards . The FASB and IASB sometimes work together to issue joint standards on hot-topic issues, but there is no intention for the U.S. to switch to IFRS in the foreseeable future. GAAP is required for all publicly traded companies in the U.S.; it is also routinely implemented by non-publicly traded companies as well. Dana Griffin has written for a number of guides, trade and travel periodicals since 1999.

• Element of reliability on the financial statements is essential for the external stakeholders like shareholders, suppliers, tax authorities, and other business partners as they rely on that.
• A contingent asset is a potential economic benefit that is dependent on future events out of a company’s control.
• Because of this consistency analysts and stockholders can evaluate financial statements with the confidence they are accurate, reliable and comparable across different periods.

The Consistency Assumption

Application of reliability assumption is not always straightforward as some account balances require judgment in finalizing their amount. For instance, reserves for the sales return, inventory obsolesce, allowance for doubtful receivables, and amount of depreciation, etc. The company’s management is expected to have reliable regulatory measures to calculate these balances.

What are the accounting principles, assumptions, and concepts?

For example, the business activities of the neighborhood coffee house are to be kept separate from the financial activities of its owners or managers. The financial statements for the coffee house will only reflect the revenue and expenses for the coffee house. The Economic Entity Assumption implies that a business’s economic activities are separate from the private activities of its owners or stakeholders.

If a company has two acceptable ways to record and/or report a transaction, conservatism directs the accountant to choose the alternative that results in less net income or a smaller asset amount. The accountant should be objective, but when doubt exists, conservatism should be used to break the tie. Materiality also allows for a mid-size company to report the amounts on its financial statements to the nearest thousand dollars.

Understanding these assumptions is crucial for effective business analysis and financial reporting. These assumptions lay the groundwork for how a financial transaction must be reported in the financial statements and make it mandatory for the companies to ensure complete adherence to all the statutory requirements. Assets, liabilities, equities, revenues, expenses, gains, losses, and cash flows are measured in terms of monetary unit of the country in which the business is operated. The assumption that the records of assets, liabilities and business activities of the entity are kept completely separate from those of the owner of the entity as well as from those of other entities.

Here’s a list of more than 5 basic accounting principles that make up GAAP in the United States.Thus, companies in these industries are allowed to depart from GAAP for specific business events or transactions. Here is a list of the four basic accounting concepts and constraints that make up the GAAP framework in the US. Monetary Unit Assumption – assumes that all financial transactions are recorded in a stable currency. Companies 5 accounting assumptions flashcards that record their financial activities in currencies experiencing hyper-inflation will distort the true financial picture of the company.

Time Period Assumption in Accounting

The SEC regulates the financial reporting of companies selling their shares in the United States, whether US GAAP or IFRS are used. The basics of accounting discussed in this chapter are the same under either set of guidelines. The financial results reported by a business should cover a uniform and consistent period of time. If this is not the case, financial statements will not be comparable across reporting periods.