Accounting Assumptions, Principles, and Constraints
The basic assumptions of accounting provide a foundation for recording the transactions and preparing the financial statements. There are two main assumptions of accounting: Monetary unit assumption and Economic entity assumption (Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2008)). The monetary unit assumption requires a company to include accounting records that show transaction data. Next, is the Economic entity assumption. It requires that activities be separate between the entity and the owner.
Accounting has Generally Accepted Accounting Principles (GAAP) that must be followed. Principles are the common set of standards that indicate how to report economic events. One very important principle is the cost principle. The cost principle dictates that a company must record assets at their own expense. Accountants can show an amount less than cost due to conservatism, but accountants are generally prohibited from showing amounts greater than cost. (Certain investments will be shown at fair value instead of cost.)
The constraint of accounting (CA) is an accounting reporting technique, consistent with a process of ongoing improvement. It is an implementation of the Theory of Constraints. Constraints represent part of the third level of the financial reporting conceptual framework developed by the Financial Accounting Standards Board. In providing information with the quality characteristics that make it useful, companies must consider two overriding factors that limit, or constrain, financial reporting. The two dominant constraints are the cost-benefit relationship and materiality. The cost-benefit relationship constraint is pervasive throughout the framework, and materiality is a threshold for recognition in financial reporting.
I believe that sound financial reporting does depend on principles, assumptions, and constraints. The rules of accounting are all in place for a reason and...
References: (Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2008), Financial accounting (6th ed.). zaAHoboken, NJ: Wiley.
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