Accounting Assumptions

Basic Accounting Assumptions

Financial statements are multipurpose documents used by many different parties for different reasons. Management use them to control their business and to make useful business decisions. Bank managers use them to decide whether loans and overdrafts should be given. Suppliers use them to decide whether credit terms should be extended. Investors use them to decide whether to invest or not.

For this reason financial statements need to be based on a generally agreed accounting framework or structure so that all parties understand how they are produced. Accounting assumptions can be considered to be the foundations on which this accounting framework is based.

What are the Accounting Assumptions?

The four basic accounting assumptions are as follows:

  1. Money Measurement Accounting Assumption
  2. Everything is recorded in terms of money. Items which cannot be recorded in terms of money are ignored and not included. It follows that the financial statements only give a partial picture of the state of a business.

  3. Business Entity Accounting Assumption
  4. For accounting purposes the business is treated as a separate entity from the owner. The accounting records show transactions of the business not the owner.

  5. Time Period Accounting Assumption
  6. The business should report its financial activities over a fixed time period usually annually, quarterly or monthly. This is sometimes referred to as the periodicity assumption.

  7. Going Concern Accounting Assumption
  8. Accounting assumes the business will continue for a long period of time and transactions are recorded on this basis.

Accounting Assumptions and Accounting Principles

Accounting assumptions are one part of a framework established by an agreed set of accounting principles, as illustrated in the diagram below.

accounting principles v 1.0
Accounting Principles Preview

The accounting principles diagram is available for download in PDF format by following the link below.

Accounting Assumptions November 6th, 2016Team

You May Also Like

Related pages

contra equity account examplesafs bondscash book ledger formatdefinition of post closing trial balanceperpetual inventory system and periodic inventory systemcreditor turnover ratioaccumulated depreciation appears on theinventory average cost methodobjectivity principle of accountingdisbursement voucher templatesample bookkeeping spreadsheetaccount receivable turnover ratiopv on excelcalculate ending inventorywip accounting treatmentdebits and creditsfifo method inventoryapportionment calculatorstock turnover rate formulagross profit calculation exampleformula for fixed assets coverage ratioadjusting entries affect the cash accountproveit accounting testbookkeeping process flowchartsum of the years digits calculatoraccrued expenses meaningdouble declining balance method formulaunearned revenue examplesreturn on capital employed ratio interpretationunits of production method of depreciationballoon payment calculator excelunderstanding credits and debitsdirect labor efficiency varianceaccrued interest journal entryledger examples of bookkeepingleverage ratios exampleswho prepares bank reconciliation statementwarranty expense on income statementtemplate timesheetdepreciation salvage valueincome statement format xlsaccounting eqautionhow to calculate net realizable valuewip productionentry for prepaid expenseroce ratiogross profit multiplierstatement of changes in equity templateentry for deferred tax assetstatement of stockholders equity exampleworking trial balance examplefob meaning shippingwhat is a transposition error in accountingsample voucher templatenetbook valuemarkup calculation in excelcash cheque definitionfinancial leverage formula accountingwhats petty cashfv pv formulacredit accumulated depreciationbond amortization schedule straight line methoddiscounted cash flows excelaccounting ledger excelcalculate lifo reservebookkeeping sheets sampletimesheet formathow to reconcile purchase ledgerbank reconciliation questions and solutionsnet present value formula excel examplebookkeeping ledger templatenet30 termscalculating total variable costperiodic and perpetual inventory system