Accounting Concepts & Assumptions

Accounting Concepts & Assumptions

Quick Study Sheet

Objectives of Financial Reporting:

1.  Provide useful information to investors and creditors for decision making 
2.  Provide information to access the amounts, timing, and uncertainty of cash 
3.  Provide information about resources (assets) and claims to resources (liabilities).

Assumptions:

Entity Assumption – each business is its own “accounting” entity – don’t mix personal & bus.

Time Period/ Periodicity Assumption– divide activities into time periods for reporting

Going Concern Assumption  – the company will remain in business – use assets/pay liabilities

Monetary Assumption – assume the dollar is stable over time.  No inflation or deflation.

Accounting Principles:

Historical Cost  –  Assets and Liabilities are recorded at cost.  Cost is the best estimate of fair value at the time the transaction occurs.  Historical cost is very reliable, not always relevant.

Revenue Recognition:   Show revenues on the income statement when: –  earned – the earnings process is judged to be complete / believe you will be paid

Comparability –  allows users to identify similarities and differences – trends over time

1) one year to the next
2) one company to another

Full Disclosure – all relevant accounting information must be disclosed to users.

1) the “notes to the financial statements” are required
2) the “notes to the financial statements” discuss details that are not shown on f.s.

Matching – expenses incurred must be matched with revenues earned in the same period

Accounting Constraints:

Consistency –  use the same accounting policies and procedures from year to year

Conservatism  –  when estimating, present the lowest asset value, the highest liability amount, and the lowest net income position

1) recognize losses as soon as you know about them
2) recognize gains when you collect the cash

Materiality – the amount is big enough to make a difference in the decision 

Cost/Benefit – the benefit must exceed the cost when gathering and presenting info

Qualitative Characteristics of Financial Information:

Quantifiable – Financial Statements report only transactions in monetary terms.

Relevance  – capable of making a difference in a decision 

1) helps the user predict the future (predictive)
2) helps the user evaluate past decisions (feedback)
3) current and available when making a decision (timeliness)

Reliability – a user can rely on it and have confidence in the information

1) represents the economic position as it really is (representational faithfulness)
2) several individuals would reach the same conclusion (verifiable)
3) doesn’t sway the user’s opinion, be objective (neutrality)