Accounting AssumptionsJune 3, 2021 2021-07-23 12:09
What are Accounting Assumptions?
The accounting assumptions are the set of rules which ensures that business operations are being processed as per the accounting standards issued by the accounting standard boards. These assumptions are fundamental accounting assumptions and also play a vital role in the preparation of financial statements. It is also mandatory to disclose all the facts of the accounting assumptions that whether the accounting assumptions are being followed while preparing the financial statements or not. If the organization has not followed the accounting assumptions then the fact is disclosed and it becomes challenging for the auditors to rely on the financial statements prepared by the accountant while auditing.
Types of Accounting Assumptions
There are mainly three types of accounting assumptions.
Going Concern, Accrual, and Consistency.
- Going Concern– In this concept, it is believed that an organization is a going concern and it will continue its operation for a longer period of time. Therefore it is being believed that the organization has an intention to grow its business and will not opt for liquidation in near future. In case the organization wants to wind up its business than in that case the financial statement. Suppose the enterprise purchases a welding machine for INR 10 lakhs. This will be treated as his asset and it has to be assumed that this asset will give future benefits. But due to any circumstances if the organization will decide to sell its machinery then the organization may earn more or less but there will not be any economic benefit from that asset in near future. If the organization considers the going concern concept then, in that case, the revaluation in the price of the machinery is certainly not considered but if the going concern concept is not there then the organization will have to consider this sale and recognize it in the books.
- Accrual basis– Accrual basis is one assumption which almost every business makes. The accrual basis concept says that the effect of any transaction is recognized as per the mercantile basis that is the effect of any transaction is given to the books of accounts at the time of an event. Accrual basis helps the management to understand the past and present financial condition of the business. The revenues and expenses should be clearly identified. In accrual basis of accounting, the revenue should be deducted from the expenses of the business to arrive at the profit figures. Accrual basis of accounting is one of the most important concepts of accounting as this is completely recognized and being followed by most businesses.
- Consistency– Consistency is an assumption that is considered as one of the prudent assumptions in an accounting policy. If an organization is preparing financial statements taking the depreciation method as a straight line then it should stick to that method for some time. This is a prudent way of following the accounting policy. In the valuation of the inventories, the method can differ in each year. In the valuation of inventories, the principle is to take the price at cost or market price whichever is lower. This is not considered as inconsistency because it is backed by the principle which is being followed. These assumptions are disclosed if not followed by the accountant.
- Business Assumption: – Business assumptions are the assumptions that are made to make certain decisions that affect the business in the future. These assumptions help to manage the uncertainty and the risk. The business assumption can be realistic or unrealistic but the businessmen should make a good assumption strategy to mitigate their risk. The business assumptions can be of finances, technology, legal, customer-based, resources, marketing, etc. These assumptions help the businessman to locate and identify the threats and the ways to mitigate them.
Key Accounting Assumptions
The key accounting assumptions are Going Concern concept, Accrual basis accounting, Consistency.
Other than that Economic entity assumption, time period assumption, reliability concepts are also there. All these assumptions form part of the financial statement and thus these are being used in a uniform manner. The accounting assumptions are adopted by making the entire necessary step and then the assumptions are being chosen.
Top Accounting Degrees:
- Bachelor’s in Accounting
- Masters in Accounting
- MBA in Accounting
- Accounting associate degree
- Ph.D. in Accounting
- CPA degree
- Chartered Accountant
These accounting degrees vary with countries. These are few accounting degrees which has very significant in this accounting world. Accounting is an art and is sometimes complicated to understand and apply and therefore, experts are appointed to get the correct solution. The accounting degrees are required to give an expertise solution to each and every solution in the organization. If the accounting is done in a correct manner then the legal and tax consequences can also be avoided. Tax planning is also done on the basis of accounting therefore accounting should be done in a very proper manner.
List of Assumptions
The topmost accounting assumptions are:-
- Going Concern assumption
- Consistency assumption
- Accrual based accounting
- Economic Entity assumption
- Money measurement assumption
- Time period assumption
- Reliability assumption
- Fair market value assumption
- Full disclosure assumption
- Revenue recognition assumption
The first three assumptions are the most commonly used assumption in any organization. These assumptions are being followed with proper disclosure. If in case the organization fails to disclose the same then also the disclosure is made about why this assumption has not being followed.
Accounting assumption is an important factor that an organization should make before finalizing its accounts. The accounting assumption helps the organization to prepare a correct and uniform accounting which in the future helps the organization in tax-related matters as well. The experts with accounting degrees are appointed so that the organization will get the exact accounting solution. Accounting assumptions require disclosure and it is seriously taken into consideration. The disclosure of the accounting assumption is one of the statutory obligations which the organizations are bound to follow.