ACCOUNTING ASSUMPTION PAGE. WHAT IS IT ALL ABOUT?

OBJECTIVE: 

Stating the assumptions/reason for any transactions included in the UBS system but 'DOEST NOT HAVE' the supporting of source documents.

Examples : i. All business transactions only have involve 'Cash Transaction' only.

                     ii. Pay wages to workers but not recorded using Payment Voucher.

                    iii. Drawing not recorded

Source of information : 1) Interview with owner

                                             2) Past data

Assumptions in accounting provide a basis in preparing, presenting and interpreting financial statements. These assumptions are held true when accountants prepare the financial statements and when users read them. In effect, accounting assumptions provide a level of foundation to help prevent misunderstandings between and among accountants and users.

The following is a detailed explanation of each of the five basic accounting assumptions namely accrual basis accounting, going concern assumptions, accounting entity principle, time period concept, and the monetary value/unit principle.

1) Accrual Basis Accounting

Under the accrual basis accounting, business transactions specifically those relating to income and expenses are recognized and recorded in the books the moment the substance of the transaction has been perfected.

Generally Accepted Accounting Principles (GAAP) prefers that financial statements are based entirely on the accrual basis accounting instead of the cash basis accounting.

In its simplest terms, the accrual basis accounting assumes that income is recognized when earned regardless of the date of payment. On the other hand, expenses are recorded when incurred regardless of whether it was paid in cash or in credit terms.

2) Going Concern Assumption

Every financial statement reports a business firm’s capacity and performance based on the understanding that the business will continue its operations indefinitely – except if there is evidence that the business firm will close its operations in the near future.

A business firm whose status is going concern reports assets based on their historical value. Similarly, assets carry a book value equivalent to the difference between their historical value and accumulated depreciation.

Under this assumption, market values are ignored as the business firm will continue operating indefinitely.

3) Accounting Entity Assumption

Basically, the accounting entity assumption is the same as the business entity principle. In this system, a business firm is considered a separate and distinct entity from its owner.

The accounting entity assumption calls for the separation of accounting records between a business firm and its owner.

4) Time Period Concept

The time period concept holds the idea that business transactions should be recorded when they occur. Recording of business transactions should be done within the course of the business firm’s operating period – either at a fiscal year or a calendar year.

Financial statements are prepared at regular intervals known as accounting periods in order to enhance the comparability within the entity and the usefulness of the financial information contained in the statements.

5) Monetary Value/Unit Assumption

The monetary value assumption also known as the monetary unit assumption holds that each business transaction is expressed in terms of a common unit of measure – a common currency that has legal tender.

Transactions are expressed in terms of money and it is known to all that an income or expense transaction is to be paid in terms of cash.