Assumptions and Accounting Principles Flashcards
Acronym for Assumptions
“Entirely from GUT”
Entity
Going Concern
Unit of measurement
Time period
Entity
the entity is separate and distinct from its owners
eg. the owners of the corporation are separate from the corporation itself, the assets do not belong to the owners but belong to the corporation
Going Concern Assumption
a business has an indefinite life that extends beyond the life of the owners
- absent evidence (eg. bankruptcy) to the contrary, a business will continue on
- assets will not be recorded unless we assumed that the business will be there in the next period to use these assets
Unit of Measurement
- everything is measured in terms of a stable monetary unit of measure
- values are not adjusted for inflation
Time Period Assumption
indefinite life is broken into time frames (year, quarter, month)
4 Accounting Principles in Conceptual Framework
1) Historical cost
2) Revenue Recognition
3) Matching
4) Full Disclosure
Historical Cost
certain assets and liabilities are recorded at cash equivalent at the time of the origin
- for many assets this value does not change overtime (ie. land or PPE)
- based on the assumptions that the cost of these assets will be consumed over the life of the asset
Revenue Recognition Principle
-revenue is recognized when realized and earned
REALIZED- recorded on the financials; cash or near cash (AR) received
EARNED- g/s has been delivered
Matching Principle
- matching is the heart and soul of accrual basis accounting
- addresses when to recognize expenses
- recognize expenses when they produce revenues
- expenses are matched with the revenue they produce
Full Disclosure Principle
- not all information can be recognized on the financial statements
eg. operating lease obligations
