Unit 3 AOS 1

Accounting assumptions

Period assumption

Accrual basis assumption

Going concern assumption

Entity assumption

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Period assumption

It is assumed that Reports are prepared for a particular period of time to obtain comparability of results

Accrual basis assumption

Revenues are recognised when they are earned and expenses when they are incurred, so profit is revenue less expenses

Going concern assumption

It is assumed that The business will continue to operate into the future and will not terminate in the near future

Entity assumption

The business is assumed to have its own financial status that is seperate from the owner and other businesses

Qualitative characteristics

Relevance

Faithful representation

Understandability

Verifiability

Comparability

Timeliness

(TURF-CV)

Relevance

Information can make a difference to business decisions, help form predictions, or confirm or change previous evaluations

Faithful representation

Financial info reflects the real world economic event it claims to, be complete, free from material error, and neutral

Understandability

Info should be clear and concise so users can understand it, such as by using graphs and other visuals, and being free from certain accounting terminology

Verifiability

Events are faithfully represented as they are supported by evidence such as source documents

Comparability

Financial info can be compared to other entities or reporting periods

Timeliness

Financial information should be available in time to make a difference to decision making

Accounting elements

Current asset

Non-current asset

Current liability

Non-current liability

Equities

Owner’s equity

Revenue

Expense

Current asset

A present economic resource controlled by the entity as a result of past events that has the potential to provide economic benefit that will be used up or turned into cash within the next 12 months

Non-current asset

A present economic resource controlled by the entity as a result of past events that has the potential to provide economic benefit for more than 12 months

Current liability

a present obligation of the entity as a result of past events that requires a transfer of economic benefit within 12 months

Non-current liability

A present obligation of the entity as a result of past events that requires a transfer of economic benefit in more than 12 months

Equities

claims on the assets of the business (liabilities, owner’s equity)

Owner’s equity

the remaining interest (value) in assets after deducing liabilities

Revenue

Items that increase assets (or decrease liabilities) which increases owner’s equity, not including capital contributions by owner

Expenses

Items that decrease assets (or increase liabilities) which decreases owner’s equity, but not including drawings by the owner

The accounting process

Source documents —> Records —> Reports —> Advice

The accounting equation

Assets = Liabilities + Owner’s equity

Tpes of source documents

receipts and bank statements (cash received by business)

Cheque butts and bank statements (cash paid by business)

Invoices (credit sales and purchases)

Memos (transactions within the firm)