Accounting assumptions

Basic standard accounting assumptions

Read this for more :

What is Going Concern ?

The financial statements are normally prepared on the assumption that an enterprise will continue in operation in the foreseeable future and neither there is intention, nor there is need to materially curtail the scale of operations. Going concern assumption is not likely to be compatible with the intention or necessity to enter into a scheme of arrangement with the enterprise’s creditors or to liquidate in near future.

Financial statements prepared on going concern basis recognise among other things the need for sufficient retention of profit to replace assets consumed in operation and for making adequate provision for settlement of its liabilities. If any financial statement is prepared on a different basis, e.g. when assets of an enterprise are stated at net realisable values in its financial statements, the basis used should be disclosed.

What is Consistency ?

The principle of consistency refers to the practice of using same accounting policies for similar transactions in all accounting periods. The consistency improves comparability of financial statements through time. An accounting policy can be changed if the change is required (i) by a statute (ii) by an accounting standard (iii) for more appropriate presentation of financial statements.

What is Accrual basis of accounting ?

Under this basis of accounting, transactions are recognised as soon as they occur, whether or not cash or cash equivalent is actually received or paid. Accrual basis ensures better matching between revenue and cost and profit/loss obtained on this basis reflects activities of the enterprise during an accounting period, rather than cash flows generated by it.

While accrual basis is a more logical approach to profit determination than the cash basis of accounting, it exposes an enterprise to the risk of recognising an income before actual receipt. The accrual basis can therefore overstate the divisible profits and dividend decisions based on such overstated profit lead to erosion of capital. For this reason, accounting standards require that no revenue should be recognised unless the amount of consideration and actual realisation of the consideration is reasonably certain.

1. Accounting Assumptions

2. What are Accounting Assumptions? The financial statements are prepared based on certain assumptions which are neither disclosed nor required to be disclosed as the same are understood, so they are called Fundamental Accounting Assumptions.

3. Need of Accounting Assumptions Need of Accounting Assumptions arises from two reasons To be logical & consistent in recording the transaction To conform to the established practices & procedures

4. Three Basic Accounting Assumptions Going Concern 2. Consistency 3. Accrual

5. Going Concern State that business will continue to exist & carry on its operation for an indefinite period in future Entity is assumed to remain in operation sufficiently long to carry out its objects and plans Values attached to assets will be on the basis of its current worth,

6. Consistency Consistency Refers to the practice of using same accounting policies for similar transactions in all periods. Improves comparability of financial statements through times. Material changes, if any, should be disclosed even though there is improvement in technique.

7. Accounting Policy can be if changed if the change is required By a statue By An accounting Standard For more appropriate presentation of financial statements

8. Accruals Accruals is concerned with expected future cash receipts and payments. Accounting process of recognizing assets, liabilities or income amounts expected to be received or paid in future. Common Examples : >>>> Purchases and sales of goods or services on credit, interest, rent ( unpaid ), wages and salaries, Taxes

9. THE END