Accounting Assumptions
* Write an essay in 250 to 300 words, Include the following: * The basic assumption of accounting * The constraints of accounting * A conclusion stating how you think sound financial reporting depends on principles, assumptions, and constraints. Refer to the U.S. GAAP in your response.
The basic assumptions of accounting = separate entity assumption- finances from the company finance so that they don’t get intertwined with the owner or shareholders finance.
Going concern assumption= the business will be operating for predictable future.
Stable monetary unit assumption= e.g. the US dollar.
Fixed time assumption= info ready and stated regularly (quarterly, annually, etc.)
The principles of accounting= past cost principle- assets are reported and presented at their original cost and no change is made for changes in market value. One never writes up the cost of an asset. Accountants are very conservative in this sense. Sometimes costs are written down, for example, for some short-term investments and marketable securities, but costs never are written up.
Matching principle - matching of revenues and expenses in the period earned and incurred.
Revenue recognition principle - revenue is realized (reported on the books as earned) when everything that is necessary to earn the revenue has been completed.
Full disclosure principle - all of the information about the business entity that is needed by users is disclosed in understandable form.
Due to practical constraints and industry practice, GAAP principles are not always applied strictly but are modified as necessary. The following are some commonly observed modifying conventions:
Materiality convention - a modifying convention that relaxes certain GAAP requirements if the impact is not large enough to influence decisions. Users of the information should not be overburdened with information overload.
Cost-benefit convention - a modifying convention that relaxes GAAP
The basic assumptions of accounting = separate entity assumption- finances from the company finance so that they don’t get intertwined with the owner or shareholders finance.
Going concern assumption= the business will be operating for predictable future.
Stable monetary unit assumption= e.g. the US dollar.
Fixed time assumption= info ready and stated regularly (quarterly, annually, etc.)
The principles of accounting= past cost principle- assets are reported and presented at their original cost and no change is made for changes in market value. One never writes up the cost of an asset. Accountants are very conservative in this sense. Sometimes costs are written down, for example, for some short-term investments and marketable securities, but costs never are written up.
Matching principle - matching of revenues and expenses in the period earned and incurred.
Revenue recognition principle - revenue is realized (reported on the books as earned) when everything that is necessary to earn the revenue has been completed.
Full disclosure principle - all of the information about the business entity that is needed by users is disclosed in understandable form.
Due to practical constraints and industry practice, GAAP principles are not always applied strictly but are modified as necessary. The following are some commonly observed modifying conventions:
Materiality convention - a modifying convention that relaxes certain GAAP requirements if the impact is not large enough to influence decisions. Users of the information should not be overburdened with information overload.
Cost-benefit convention - a modifying convention that relaxes GAAP