FINANCIAL ACCOUNTING PRINCIPLES

conventions and principles. questions 3.1 for practice

accounting entity assumption

a business is viewed as being separate from its owner(s).

• the business accounting records cannot interfere with personal records

• personal records cannot interfere with busniess records

accounting period assumption

divides the life of a business into equal arbitrary intervals of time for reporting purposes

• this happens so it is easier to record and spot patterns and differences from one period to the next in order to make decisions and improve performance

• reports cannot be done over years they must be within a 12 month gap

historical cost assumption

the original cost of an asset when first purchased is put into records/ an assets acquisition value

going concern assumption

assumes that a business will exist in the seeable future which will be reflected in balance sheet.

• when a management needs to liquidate their assets the going concern assumption are going to be set aside

montary assumption

element of financial statements in their reporting will be expressed in monetary terms eg- correct currency and dollar terms as well as expressing units in dollars

materiality assumption

the extent to which a mistake can influence decisions depending on the material assets eg. big company not recording $1k worth of supplies vs a small company meaning decisions will be influenced

accurl accounting assumption

recognising when a transaction takes place but not when the money comes in.

asset

a present economic resource contolled by the entity as a result of a past event

liability

a present obligation of an entity to transfer an economic resource as a result of past events

equity

the residual interest in the assets of the entitiy after deducting all its liability

income

increase in assets or decreases in liability which result with an increase in equity, other than those relating to contributions from holders in equity claims

expense

decrease in assets or increases in liability that result with a decrease in equity, other than those relating to contributions from holders in equity claims