U3, AOS 1 - KK1 - Accounting Assumptions Flashcards
Accounting Entity Assumption
The assumption that 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.
Going Concern Assumption
The assumption is that the business will continue operation in the future, and its records are kept on that basis.
Period Assumption
The assumption that reports are prepared for a particular period of time, such as a month or year, in order to obtain comparability of results.
Accrual basis assumption
The assumption that revenues are recognised when earned and expenses are recognised when incurred, so profit is calculated as revenue earned in a particular period less expenses incurred in that period.
The acronym you can use to remember the four assumptions is…
P-A-G-E
Accounting assumptions are…
…fundamental principles that form the basis for accounting. They guide the preparation and presentation of financial statements. These assumptions help ensure consistency and comparability in financial reporting.
Ensuring the Owner records any transactions he/she has with the business follows which Assumption:
Entity: the business is separate from the owner and other entities. Business records should reflect this relationship
Practice Question
On 1 January, Mark provided his accountant with a list of assets he had contributed to his business: Cash $40000, Computer Equipment $4000, Motorbike $16000. He also has $8000 in a personal bank account.
Identify one accounting assumption that supports your treatment of Mark’s personal bank account. Justify your answer. (3 marks)
The Accounting Entity assumption (I) states that the business is a separate entity to the business owner (D), and as a result, the personal assets of Mark (L) should be kept separate from those of the business so his personal bank account should not be included as it is not used for business purposes.
