Checkpoint: Accounting Assumptions, Principles, and Constraints

Checkpoint: Accounting Assumptions, Principles, and Constraints Rachel Kershaw XACC/280 Jeremy Zager April 20th, 2012

Rachel Kershaw

Checkpoint: Accounting Assumptions, Principles, and Constraints Accounting Assumptions, Principles, and Constraints

In Chapter one of the textbook for this course Assumptions are discussed on page 10. The two main assumptions are the monetary unit assumption and the economic entity assumption. The monetary unit assumption means that the company includes only transaction data that is expressed in terms of money. This assumption is vital to applying the cost principle; this also allows accounting to measure economic events. The Economic Entity Assumption is defined as being any organization, business or unit in society. The textbook says that this assumption requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities. In Chapter Seven Assumptions are discussed a bit more in depth introducing two addition assumptions. The first assumption the time period assumption is defined as an assumption that states that the economic life of a business can be divided into artificial time periods. A company can subdivide business activity into a year, months, or quarterly. The final assumption is the going concern assumption which assumes that the company will continue in operation long enough to carry out its existing objectives. If this particular assumption is not used then plant assets should be stated at their liquidation value not at its cost. The principles of accounting dictate how economic events should be recorded and reported. The first principle discussed is the revenue recognition principle, which dictates that companies should recognize revenue in the accounting period in which it is earned. The matching principle also known as Expense Recognition dictates that companies match expenses with revenues in the period in which efforts are made to generate revenues. The full disclosure principle requires that companies disclose circumstances and events that make a difference to financial statement users.

Rachel Kershaw

Checkpoint: Accounting Assumptions, Principles, and Constraints This takes place through the data contained in the financial statements and any notes contained in

that statement. The notes usually contain a summary of significant accounting policies. The cost principal is discussed in chapters one and Chapter seven. We learned in chapter one that this principle dictates that companies must record assets at their cost. The cost is relevant and reliable and that is why it is most often used. There are constraints that permit a company to modify the principles mentioned above without taking anything away from the usefulness of the report. Materiality shows the items impact on the companys overall financial status. Conservatism dictates that when in doubt; choose the method that will be least likely to overstate assets and income. The (GAAP) Generally Accepted Accounting Principles are a set of rules and practices, having substantial authoritative support that is recognized as a general guide for financial reporting purposes.

Rachel Kershaw