Theory- Accounting Assumptions Flashcards
Balance Sheet
Current assets Add non current assets
CAB. Pp&e
Inventory control Asset
A/R. Less acc deprec on asset
Less Provisions. Investments
Prepaid. Shares
Accrued. Intangibles
Less current liabilities less liabilities
Accounts Payable. Bank loan/mortgage
accrued. NET ASSETS
Unearned
GST Represented by OE
WORKING Capital. Capital add net profit less
drawings
Profit and loss statement for the period ended
Revenues Sales Less sales returns Cost of goods sold & inventory adjustment Add other rev
Less other expenses S&D G&A F Interest expense NET PROFIT
Assumptions, why?
Accounts comply with standards to ensure the integrity of accounting profession and financial information produced. Assumptions are important underlying facets of any accounting report. Although they are conceptual, they have a practical significance in the accounting process. The uniformity of assumptions assist with understanding the framework in which financial reports are prepared.
Entity assumption
Assumes that the business and its owners financial affairs have a separate existence.
Distinction made
Important so business’ affairs will only reflect business activities
Accounting period assumption
Divides the life of an enterprise into arbitrary time periods
For calc of profit/loss
ATO
Indicates successfulness of business
Matching principle
Part of period assumption
Revenues and expenses must fit into each time period
Accrual accounting concept allows recognition for r&e that have not yet been received or paid
Any r&e must be included in p&l
Balance day adjustments necessary to bring revenues aNd expenses into line with current finial year.
Monetary assumption
Assumes that all transactions can be recorded in money terms
Money common denominator in economics
Helps with analysis of fusiliers
All figures = in value
Historical cost assumption
The historical cost assumption refers to the recording of times @ their original purchase price
Objective rather than subjective value in books
Reliable info
Does not eliminate the subjective nature of accounting
Going concern assumption
Accounting reports are prepared under the premise that the entity will continue to operate in the foreseeable future
Future unpredictable
Assets may considered less value if business doesn’t continue
Qualitative characteristics
These are the attributes that financial info should possess if it is to be included in financial reports Relevance Reliability Materiality Comparability Understandability
Constraints
Timeliness- has report been presented in a timely fashion can relevant decisions be made on info due to time (old)
Cost vs. benefit- is cost of producing financial reports worth it for the business
Relevance & reliability
The financial info must have value in terms of; assisting users in making & evaluating decisions about the allocation of financial, physical and human resources.
Reflecting accountability by the preparers of financial info
Financial info must be free from bias and undue errors
Materiality
Although info may be relevant in the general operations of the business it may not be significant when reporting. Important to recognise if decision making will be affected by omission of info. Non-disclosure of any item of info may have a affect on the overall financial info if the effect of the omission has little significance than it can be concluded that it is not significant.
Comparability & understandability
An entity at one time is is compared over time
An entity is compared with another entity
Consistency in reports over time
Changes noted
Info needs to be presented in an understandable way; think about users and their acc knowledge
Don’t sacrifice relevance and reliability for understanding
Add notes
Format and visuals
