Accounting consists of basic assumptions, principles, and constraints. There are four basic assumptions of accounting that are the fundamental basis of any set of accounts. The four basic assumptions of accounting include: monetary unit assumption, economic period assumption, time period assumption, and going concern assumption. Monetary unit assumption states that only transaction data that is expressed in terms of money can be included in the accounting records. Economic period assumption states that the activities of the entity should be kept separate and distinct from the activities of the owner and of all of the other economic entities. Time period assumption states that the economic life of a business can be divided into artificial time periods. Going concern assumption states that the company will continue in operation long enough to carry out its existing objectives.
The four principles of account include: revenue recognition principle, matching principle, full disclosure principle, and cost principle. The revenue recognition principle states that companies should recognize revenue in the accounting period in which it is earned. The matching principle dictates that companies match expenses with revenues during the period when efforts are made to generate revenues. Full disclosure principle requires companies to disclose circumstances and events that make a difference to the financial statement users. Cost principle states companies but record assets at their own cost. Along with the four basic assumptions of accounting and the four principles of accounting, there are two constraints of accounting. These constraints are: materiality that relates to an item’s impact of the firm’s overall financial condition and operations; and conservatism which dictates when a company is in a doubt and that there company should choose the method that will be least likely to overstate assets and income.
Financial reporting depends on principles, assumptions, and...
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