006 Assumptions, Accounting Principles Flashcards
What is the entity assumption?
We assume there is a separate accounting entity for each business organization.
What is the going concern assumption?
In the absence of information to the contrary, a business is assumed to have an indefinite life, that is, it will continue to be a going concern.
What is the unit of measurement assumption?
Assets, liabilities, equities, revenues, expenses, gains, losses, and cash flows are measured in terms of the monetary unit of the country in which the business is operated.
What is the concept of capital maintenance?
Capital is said to be maintained when the firm has positive earnings for the year, assuming no changes in price levels.
What is the time period assumption?
The indefinite life of a business is broken into smaller time frames, typically a year, for evaluation purposes and reporting purposes.
What does the historical cost accounting principle state?
Assets and liabilities are recorded at historical cost, that is, their cash equivalent amount at time of origination. This value is the market value of the item on the date of acquisition.
What are revenues?
Revenues are increases in assets or extinguishment of liabilities stemming from delivery of goods or from providing services – the main activities of the firm.
When should a company recognize revenues?
Revenues are recognized when they are earned and collectability is reasonably assured.
When does realization occur in the accounting period?
(1) Goods or services have been provided, (2) Collectability of cash is assured, (3) Expenses of providing goods and services can be determined.
How do we measure a revenue?
Revenues are measured as the cash equivalent amount of the good or service provided.
What is the matching principle?
Recognize expenses only when expenditures help to produce revenues.
What is the full disclosure principle?
Financial statements should present all information needed by an informed reader to make an economic decision. This principle is sometimes referred to as the adequate disclosure principle.
