Question

1. Name the assumptions underlying generally accepted accounting principles. Comment on the validity of the stable unit of measurement assumption during periods of high inflation.

2. Identify and discuss the underlying assumptions or concepts of accounting

Answer 1

1. The assumptions underlying accepted accounting principles are:

(I) Economic entity

(ii) Going Concern

(iii) Periodicity

(iv) Stable monetary unit

The assumption of stable unit in accounting has necessitated the examination of historical cost assumption. The changes in level of the prices has put forward suggestions that accounts must be incorporated to reflect the effect of price level changes. The effect can be reflected through creation of reserved, revaluation of assets among others. Recording the assets at the original cost shows incorrect value of the financial items and may perplex the users decision. The changes in the monetary values has led to the FASB consider inflation accounting.

2.

The underlying assumptions or concepts of accounting:

(I) Economic entity assumption: The business is separate from its owners and the economic activity can be identified with a particular level of accountability. Only transactions relating to the business are recorded in the accounts.

(ii) Going concern assumption: Its presumes that the business will have long life and continue to exist in the foreseeable future. Only if the liquidation of the business is unavoidable this assumption stands invalid.

(iii) Monetary Unit assumption: It assumes that the money is the common denominator as the basis for recording accounting transactions ,measurement and analysis. It is useful in making prudent economic decision and better communication of financial results to the investors.

(iv) Periodicity assumption: This assumption states that the economic activities can be divided into time periods like monthly, quarterly, yearly etc. The shorter the accounting period the greater the difficulty in preparing accounts.