ACCOUNTING ASSUMPTIONS, PRINCIPLES, AND CONSTRAINTS
March 29, 2013
The basic assumptions are monetary unit assumption and the economic entity assumption. The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. This assumption enables accounting to measure economic events. The monetary unit assumption is vital to applying the cost principle. An economic entity can be any organization or unit in society. It may be a company, government unit, a municipality, a school district, or a church. The economic entity assumption requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities (Weygandt, Kimmel, & Kieso, Financial Accounting).
The accounting profession has developed standards that are generally accepted and university practiced. This common set of standards are called generally accepted accounting principles (GAAP), indicate how to report economic events. The Securities and Exchange Commission (SEC) is the agency of the United States government that oversees U.S. financial markets and accounting standard-setting bodies.
There are four principles of accounting. They are the cost principle. Business are required to record and report assets based on the actual cost incurred to acquire them rather than the free market value of the acquired asset themselves. The idea behind this principle is that this method of recording and reporting is reliable and lessens the opportunity for factors such as biased market values to interfere with the accounting. However, this method may be viewed as irrelevant as it relates to the actual value of assets. The second principle is the accrual principle. Businesses are required to record and report revenue at the time it is earned and realized by the business, not when the cash for the revenue is received by the business....
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