Question

Identify and discuss the underlying assumptions or concepts of accounting.

Answer 1

List of Key Accounting Assumptions

Here is a list of the key accounting assumptions that make up generally accepted accounting principles:

Monetary Unit Assumption

Periodicity Assumption

Monetary Unit Assumption

Monetary Unit Assumption – assumes that all financial transactions are recorded in a stable currency. This is essential for the usefulness of a financial report. Companies that record their financial activities in currencies experiencing hyper-inflation will distort the true financial picture of the company.

Periodicity Assumption

Periodicity Assumption – simply states that companies should be able to record their financial activities during a certain period of time. The standard time periods usually include a full year or quarter year.

Fundamental Accounting Concepts and Constraints

Here is a list of the four basic accounting concepts and constraints that make up the GAAP framework in the US.

Business Entity Concept

Going Concern Concept

Materiality Concept

Industry Practices Constraint

Business Entity Concept

Business Entity Concept – is the idea that the business and the owner of the business are separate entities and should be accounted for separately. This concept also applies to different businesses. Each business should account for its own transactions separately.

Going Concern Concept

Going Concern Concept – states that companies need to be treated as if they are going to continue to exist. This means that we must assume the company isn’t going to be dissolved or declare bankruptcy unless we have evidence to the contrary. Thus, we should assume that there will be another accounting period in the future.

Materiality Concept

Materiality Concept – anything that would change a financial statement user’s mind or decision about the company should be recorded or noted in the financial statements. If a business event occurred that is so insignificant that an investor or creditor wouldn’t care about it, the event need not be recorded.

Industry Practices Constraint

Industry Practices Constraint – some industries have unique aspects about their business operation that don’t conform to traditional accounting standards. Thus, companies in these industries are allowed to depart from GAAP for specific business events or transactions.