There are some accounting assumptions which all entities generally follow. Unless it is specified it is always assumed that such accounting assumptions are implemented in the financial statements. The basic assumption of accounting state how a business operates. There are various accounting assumptions like going concern, money measurement etc.
Basic Assumption of Accounting
Some of the basic accounting assumptions are as below: –
Business Entity Concept
Business entity concept explains that business is has a distinct entity which is separate from its owners.
Thus, it is distinct from the proprietor. We record the financial transactions in the books of business. We do not record such transactions from the proprietor’s point of view.
Transactions between business and owners are also recorded in the books like capital introduced in business, drawings etc. Only the business transactions are recorded.
Business always has a separate entity whether it is a sole proprietorship, partnership, company etc. The income or the profit is the property of the business unless we distribute it to members or owners.
Also, we do not consider the personal assets of the owners or the shareholders while reporting the business assets.
Learn more about Modifying Principles here in detail.
Going Concern Concept
We generally assume that the business will continue for an indefinite period. There is no need to close such business. It is the duty and responsibility of an accountant to treat the business activities as a continuing process.
Money Measurement Concept
Accounting transactions must have a monetary value. As per the money measurement concept, only those transactions which can be expressed in terms of money are to be recorded in the books of accounts.
Hence, we do not record the transactions which we cannot express in terms of money even if they are very important for the business.
For example, we do not record events like death, sentiments, efficiency, change in economic, industrial and fiscal policies of the government, change in fashion etc. in the books of accounts. Recording the transactions in monetary terms makes the information more useful.
The Accounting Period Concept
The life of a business is divided into parts. Each part is the accounting period. There is no such significant change because one accounting period ends and a new accounting period begins.
Currently, the accounting period consists of twelve months. Period of twelve months is an ideal period for accounting.
Accountants should be careful in recording the revenue and expenses for an accounting period. No entity can ignore the Accounting period concept.
The Accrual Concept
This concept is based on the recognition of both cash and credit transactions. As per the accrual concept, we recognize revenue and cost as and when they occur rather than when we actually receive and pay them in cash.
Dual Aspect Concept
Every financial transaction has double effects. There are two sides to a transaction. Recognition of two aspects of transactions is known as dual aspects. The modern accounting system is based on the dual aspects.
Revenue Matching Concept
Earning profit is the motive of business entities. As per the revenue matching concept, income can be ascertained by matching the revenue of the business with its cost.
Solved Example on Assumption of Accounting
Explain the concept of consistency?
Answer: – As per the concept of consistency the methods and practices of accounting shall be consistent so that we can make comparisons and take correct decisions.
According to the concept of conservatism, business adopts a very safe policy. Also, according to this concept, business accounts for all the prospective losses but it leaves aside all the prospective profits.
As per prudence, business transactions should be recorded in such a manner that the profits of the business are not overstated. Thus, the application of conservatism (prudence) is evident from the following facts:
- Valuation of stock at cost or net realizable value whichever is lower
- Creation of investment fluctuation fund
- Ignoring discount on creditors
- Ignoring the appreciation of assets
- Making provision for bad and doubtful debts