Accounting Assumptions
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Since accountants needed more detailed guidelines to solve the practical problems, the FASB set forth operational guidelines to assist accountants. These guidelines are known as assumptions, principles and constraints. Assumptions are a way to show accountants a foundation for the accounting process. Some of the basic assumptions are things such as monetary units, economic entity, time period and going concern. With a monetary unit assumption it is assumed that transaction data can be shown in terms of money and it also assumes that the unit of measure stays very much the same over a time period. An economic entity assumption assumes that the activities of one company are kept separate from the activities of the owner and another company. The time period assumption assumes that companies are able to separate their activities into various time frames, such as quarterly or yearly, to have a better reporting process. Finally we have the going concern assumption and that assumption assumes that a company will be around long enough to reach its existing goals.
Now we look at the principles of accounting which are the rules that show how events should be reported in the accounting processes. The first principle is the revenue recognition principle which means a company should pinpoint revenue in the particular accounting time it was earned, but not necessarily during the time that the company received the money. Next principle is the matching principle and that simply means companies match expenses with monies during the time in which an effort was made to generate that money. However this is not always an easy thing to accomplish and several ideas have been put forward to assist on matching expenses and revenues on statements. The third principle is the full disclosure principle and that states that a company lets user know what has made a difference in that companys financial report. Finally we have the cost principle and that principle states that businesses report what they have at cost.
All of this work does not go without constraints and those constraints are materiality and conservatism. Materiality is items that affect a companys financial condition and operations. Conservatism states that when a company is in doubt of its situation it should choose the way that will less likely blow up their assets and income. This will help during difficult times and no company should ever overstate themselves.
With all the assumption and constraints it is no wonder that standard principles had to be developed so that all companies were on the same page concerning their financial reporting. The generally accepted account principles (GAAP) have done just that. The security and exchange commission recognized the need for these principles and without them companies could report what they wanted when they wanted. This could lead to dishonest practices and many people making bad investments unaware.