Accounting Assumptions, Principles and Constraints
Basic assumptions accounting consists of four assumptions; monetary unit assumption, economic entity assumption, time period assumption, and going concern assumptions. The monetary unit assumption states that only transaction data that can be expressed in terms of money be included in the accounting records. Economic entity assumption is the activities of the entity be kept separate and distinct from the activities of the owner and all other economic entities. The time period assumption states that the economic like of a business can be divided into artificial time periods. Going concern assumptions assumes that a company will continue in operation long enough to carry out it’s existing objectives.
There are four principles to accounting; revenue recognition, matching, full disclosure, and cost principle. Revenue recognition shows that companies should recognize revenue in the accounting period in which it is earned. Matching principles dictates that companies match expenses with revenues in the period in which efforts are made to generate revenue. The full disclosure circumstances and events that make a difference to financial statement users. Cost principle dictates that companies record assets at their cost.
The two major constraints of accounting are materiality and conservatism. Materiality relates to an items impact on a firm’s overall financial condition and operations. Conservatism dictates that when in doubt, choose the method that will be likely to overstate assets and income. Financial reporting is a key element to define the current financial state of a company. Assumptions provide the foundations of the accounting process. Principles are the basically the rules that regulate how the economic events should be reported. Constraints basically provides somewhat of a relaxation of the principles...