Accounting Assumptions
Accounting assumptions are the guidelines that companies must adhere to in order to create reliable financial statements. These assumptions include the use of a uniform method of accounting and the maintenance of certain standards. This ensures that financial statements can be compared across years. A key example of this is the periodicity assumption, which states that a company should maintain financial records for a certain period of time.
Accounting assumptions help the organization prepare accurate financial statements that comply with GAAP and FASB standards. They also establish a basis for consistent, reliable, and valuable information. Generally, accounting assumptions are based on such fundamentals as monetary units, business entities, period, and historical costs, as well as the principle of conservatism.
Another common assumption is the going concern assumption. Under this assumption, the company’s assets will be stable and continue to exist. Generally, this assumption means that the business will remain in business for many years to come. This assumption also makes comparisons easier. In the case of a deferred advertising expense, the company can amortize it over the years to come. This is possible due to the going concern assumption.
The economic entity assumption is an important one, particularly for small businesses. It assumes that the business records will be separate from the personal records of the owners. In reality, no business should mix up personal and business transactions. Small family-owned businesses are especially vulnerable to this issue. The accounting field is thriving and developing, and accounting assumptions are critical for ensuring a sound financial statement.
The going concern assumption is another important assumption in accounting. This enables companies to prepare financial statements that reflect the value of their assets. While the going concern assumption is vital for the preparation of financial statements, it is not applicable to bankruptcy proceedings. Assuming that the company will remain in business, it is important to recognize the value of its assets as they are in their current market value.
Another important accounting assumption is the money measurement concept. In this, every worth transaction should be recorded in monetary terms. This enhances the reliability of financial statements and lays the foundation for a sound financial reporting process. Moreover, it also helps companies adhere to all statutory requirements. These assumptions are important for both the management and the readers of financial statements.
Fundamental accounting assumptions are based on the underlying principles of accounting. These assumptions should be applied equally by all companies, regardless of the size and industry. For example, they should be consistent in nature, with all companies using the same financial reporting process. In addition to a common principle, fundamental accounting assumptions should be based on the needs of different entities.
Going concern is one of the most important assumptions in accounting. This assumption states that a business will continue to operate in the foreseeable future. In other words, it assumes that a company will not go bankrupt and that it will meet its objectives and obligations.
