Accouting Case
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Question 1
Assumptions
Are the real basic of accounting. It can be said that assumptions are the essential guidelines which businesses prepare their financial statements. I will now name a few assumptions and describe what they are most significant:
– Entity unit assumption, which means the business, is completely not united with the owner.
– Going concern assumption means that the business has no ending to its business life. In other words it has no predefined period which it could cease business.
– Time period assumption means that all the profit and losses are measured on daily, monthly, yearly basis.
– Consistency is when businesses use the same accounting techniques.
Axiom
An axiom is a statement that is assumed to be true. It is a mathematical statement that is accepted as being correct and true without the appropriate mathematical proof. An axiomatic system will be called complete if for every statement, either it or its negation is derivable.
Concepts
Concepts are things that actually underpin the whole preparation of any set of accounts. “Going concern”, “Prudence”, “Matching accruals” are some
Conventions
Are the guidelines that will arise from application of accounting principles. It is not legally binding and is accepted based on customs. It is something that will help accountants overcome practical problems when preparing statements.
Postulates
Include the statements that the economic activity that happened will keep on happening. The transactions occur at times, which can be identified, and the entity will continue making it happen. It is not something controversial but difficulties may arise in advanced accounting practices. There could be some disagreements on timings for items that were recorded of revenue, etc and this may cause problems for accountants.
Accounting principles
Consists of 3 important rules. The basic accounting principles and guidelines, detailed rules and standards and the generally accepted accounting practices. This actually attempts to standardize and regulate accounting definitions, assumptions, and methods. Because of generally accepted accounting principles we are able to assume that there is consistency from year to year in the methods used to prepare a companys financial statements.
Procedures
There are month-end procedures and year end procedures. Prior to closing the month and year it is recommended that you make backups of your data. It is especially important to make a backup before performing certain irreversible functions, such as running month-end or year-end procedures.
Question 2
The concepts and conventions are the result of the development of practical application of principles from the accounting, providing uniform interpretation of financial statements.
Historically, the starting-point for accountants has been the fundamental accounting concepts listed in SSAP 2 (statement of accounting practice), which describes some concepts such as Going Concern and Accruals. This was succeeded by FRS18. The last one describes the qualitative accounting concepts and conventions: Understandability, Relevance, Consistency, Objectivity, Comparability and Reliability.
GOING CONCERN CONCEPT
This concept states that a business firm will continue to carry on its activities for an indefinite period of time. Simply stated, it means that every business entity has continuity of life. Thus, it will not be dissolved in the near future. This is an important assumption of accounting, as it provides a basis for showing the value of assets in the balance sheet.
ACCRUAL CONCEPT
Accrual concept is something that becomes due to be paid or received at the end of the accounting period. Both transactions will be recorded in the accounting period to which they relate. Therefore, the accrual concept makes a distinction between the accrual receipt of cash and the right to receive cash as regards revenue and actual payment of cash and obligation to pay cash as regards expenses.
The accrual concept under accounting assumes that revenue is realised at the time of sale of goods or services irrespective of the fact when the cash is received.
UNDERSTANDABILITY
This implies the expression, with clarity, of accounting information in such a way that it will be understandable to users – who are generally assumed to have a reasonable knowledge of business and economic activities.
RELEVANCE
This Convention states that in order to avoid wasting time and money, must register with the Accounting only events worthy of attention and in a timely manner. For example, where employees of the office paper and printed using the firm registers a decrease in assets of the company, this decrease could theoretically be launched in the accounting records as they occur. However, this is not done, the irrelevance of the operation, and the only expense is calculated at end of period inventory by difference.
CONSISTENCY
Thus, the Convention of Consistency tells us that, once adopted certain process among the various possible that can meet the same general principle, it should not be changed too often,