Accounting Assumptions Flashcards
The accounting Entity Assumption
The records of assets, liabilities and business activities of the entity are kept completely separate from those of the owner of the entity as well as from those of other entities. A separate set of accounting records is maintained for each entity, and the financial statements prepared provide information on that entity only.
the accrual basis assumption
Under the accrual basis of accounting, revenue is recognised in the period in which the expected inflow of economic benefits can be measured in a faithful and verifiable manner, that is, revenue is recognised when it is earned.
Expenses are recognised when the consumption of goods and services can be measured, that is, expenses are recognised when they are incurred.
Accrual basis profit for an accounting period is determined by subtracting expenses incurred for a period from revenue earned in that same period.
The going concern assumption
Financial reports and prepared on the assumption that the entity will continue to operate in the future. It is assumed that the entity will not be wound up in the near future but will continue its activities.
The period assumption
Reports are prepared for a particular period of time, such as a month or a year, in order to obtain comparability of results.
Profit determination involves a process of recognising the revenue for a period and deducting the expenses incurred for that same period. A distinction can be made between assets, which will provide benefit to future reporting periods, and expenses that are totally consumed within one reporting period.
