Assumptions, principles, and constraints are the operational guidelines set by the FASB. These principles where put in place to provide a foundation, with specific rules on how to report economic events, while allowing for constraints or relaxation of the principles under certain circumstances. Assumption of accounting
There are two assumptions in accounting that provide a solid foundation for accounting, the monetary unit assumption and the economic entity assumption. The monetary assumption is very important when applying to the cost of principle. Only the transaction data dealing money from companies are included. The economic assumption is any organization or unit of society, but requires each enmity to be kept separate. For example, an owner of a dress shop must keep their business expenses separate from their personal living cost. Principle of Accounting
Now matter which assumption is used all financial data is entered into a financial report in GAAP (generally accepted accounting principle), a common set of standards that all accountants can understand universally. These accounting principles were set by three groups, The Securities and Exchange Commission (SEC), The Financial Accounting Standards Board (FASB), and The International Accounting Standards Board (IASB). These three groups work closely together to minimize differences in accounting principles. Constraints
The only exception to the generally accepted accounting principles is the constraints that allow companies to modify principles, materiality and conservatism. Materiality constraint allows a company to modify principals when it will influence the decision of an investor. The conservatism constraint is least likely to overstate assets and income. Conclusion
Financial accounting relies heavily on the principles, assumptions and the constraints to perform accurately and universally. Without the standards set forth by the GAAP everyone would record their...