A firm foundation is required in any structure so that it will not collapse in the future. So as in the accounting, a basic idea which is the basis for the accounting processes is being formed and created and these are called accounting assumptions. This assumption is used as the understructure of accounting to prevent misunderstandings of the use of financial statements. Another name for the accounting assumption is postulates that are being used to improve the understanding and the usefulness of financial statements.
There are two key assumptions in accounting and these are accrual and going concern. It included in the basic assumptions of accounting are accounting entity, the time period and monetary units.
Accrual
Accrual accounting is the basis for preparing the financial statements of each accounting period. So, what does that mean accrual accounting? This means that revenue is being recognized when earned regardless of when the payment is received and expenses is recognized when incurred regardless of when to be paid. As you can see under this basis the effects of the transactions are being recognized when they are occur and not when cash is received or paid. The essential of accrual accounting is the recognition of the following accounts: account receivable, account payment, prepaid income, provisions, accrued and deferred income.
Continuity
What is the mean by the going concern assumptions is that the entity is being viewed as continuing in operations indefinitely even in the adsence of proof to the contrary. In the same words, the financial statements are prepared in the sense that the company will continue to operate in the future. This assumption ignores the market value and normally recorded assets at cost. Going concern assumption is also called the assumption of continuity and is the core of the principle of the cost.
Other basic accounting underlying assumptions
Accounting entity
These accounting units is perhaps in the form of proprietorship, partnerships or corporation cause in financial accounting entity is the particular corporate form. In this assumption, it is determined that the entity is separate from the owner, managers and employees. It means that each transaction od the entity is separate and must not be merged with that of the owner and other group of people. Fair Presentation of Financial Statements is the reason for this assumption so that the personal transaction of the owner does not distort to the financial statementsof the entity. If a parent subsidiary relationship exist a consolidated statement must be made for the reason that the parents and the subsidiary is a single economic entity.
Time Periods
Timely information is very important in a company for this is needed in every economic decision to be made. Periodic reports of the financial statement must be prepared to comply with the presentation of timely informations. The time period assumption is a subdivision of the life of a company in the indefinite life of a company. This division is usually the same length. Fiscal or accounting period is one year or 12 months. There are two types of accounting period, the calendar year that is a 12-months period ending in 31 December, and the natural business year that is a 12-months period ending in each month.
Monetary/Currency Unit
Quantifiability and the stability of the currency units is the two aspects of the monetary unit assumption. The quantiability means that the assets, liabilities, income and expenses must be stated in terms of unit of measure. While the stability of the currency unit means that the purchasing power of the monetary unit is stable and if ever there are instability it will be ignored cause it is immateral.
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