What is the meaning of accounting assumptions?

Accounting Assumptions are the basic notions or

fundamental premises on which the accounting process is based. It served as the foundation or bedrock
of accounting in order to avoid misunderstanding but rather enhance the understanding and usefulness
of the financial statements. Accounting assumptions are also known as “postulates”.

Explain briefly the four (4) underlying assumptions. Going concern assumption (explicitly provided in the
conceptual framework). The entity is assumed to carry on its operations for an indefinite period of time.
The financial statements are prepared on a going concern basis unless the entity either: a. Intends to
liquidate the entity or to cease trading, or b. Has no realistic alternative but to do so.

The measurement basis involving mixture of costs and values is appropriate only when the entity
qualifies as a going concern. If the entity is under liquidating concern, the appropriate measurement
basis is realizable value; i.e. – estimated selling price less estimated costs to sell for assets and the
expected settlement amount for liabilities.

Implicit assumptions-not expressly provided in the Conceptual Framework. Separate Entity (Accounting
entity / Business entity concept / Entity Concept) - The entity is treated separately from its owners. In
financial accounting, the accounting entity is the specific business organization which may be a
proprietorship, partnership or corporation. - Accordingly, the transactions of the entity shall not be
merged with the personal transactions of the owners.

The reason for the accounting entity is to have a fair presentation of financial statements. However,
where parent and subsidiary relationship exists, consolidated statements for the affiliates are usually
made because for practical reasons and economic purposes, the parent and the subsidiary are a “single
economic entity”. The consolidation of the financial statements however does not eliminate the legal
boundary segregating the affiliated entities. Accounting will continue to be done separately for each
entity.

Time period - Time period assumption requires that the indefinite life of an entity is subdivided into time
periods or accounting periods which are usually of equal length for the purpose of preparing financial
statements or reports on financial position, performance and cash flows. - Accounting period or fiscal
period is one year or a period of twelve months. - Calendar year is a twelve-month period that ends on
December 31. - Natural business year is a twelve-month period that ends on any month when the
business is at the lowest or experiencing slack season. - Fiscal period is an accounting period the begins
on any month except January 1 and ends in any month except December 31

Monetary Unit This accounting assumption has two aspects namely; 1. Quantifiability-means that the
assets, liabilities and equity, income and expenses should be stated in terms of a unit of measure which
is the peso in Philippines. 2. Stability of the Peso-means that the purchasing power of the peso is stable
or constant and that its instability is insignificant and therefor may be ignored.
UNDERLYING ASSUMPTIONS

Accounting assumptions are the basic notions or fundamental premises on which the
accounting process is based.

Accounting assumptions serve as the foundation or bedrock of accounting in order to

avoid misunderstanding but rather enhance the understanding and usefulness of the
financial statements. Accounting assumptions are also known as POSTULATES.

The new conceptual framework for Financial Reporting mentions only one assumption,
namely going concern. Accrual is no longer carried forward as underlying assumption in
the new Conceptual Framework.

However, implicit in accounting are the basic assumptions of accounting entity, time
period and monetary unit.

Accounting Theory, Concepts and Assumptions

Accounting Theory is logical reasoning in the form of set of broad principles that;

1. provide a general frame of reference by which accounting practice can be

evaluated; and

2. guide the development of new practices and procedures.

It is the organized set of concepts and related principles that explain and guide the
accountant’s action in identifying, measuring, communicating accounting
information.

- Accounting Theory comprises the Conceptual Framework and the Philippine

Financial Reporting Standards (PFRSs)

Accounting Theory, Concepts and Assumptions

Accounting Postulates (accounting assumptions) are the fundamental concepts or principles and basic
notions
that provide the foundation of the accounting process.

Underlying assumption-explicitly provided in the Conceptual Framework.

Going concern assumption-the entity is assumed to carry on its operations for an indefinite period of
time.

The Financial Statements are prepared on a going concern basis unless the entity either:

Intends to liquidate the entity or to cease trading, or;

Has no realistic alternative to do so.

The measurement basis involving mixture of costs and values is appropriate only when the entity
qualifies as a
going conern. If the entity is under liquidating concern, the appropriate measurement basis is realizable
value,
i.e. estimated selling price less estimated costs to sell for assets and the expected settlement amount for
liabilities.

Accounting Theory, Concepts and Assumptions

II. Implicit assumptions-not expressly provided in the Conceptual Framework.

1. Separate entity (Accounting entity)/ Business entity concept / Entity

concept)- the entity is treated separately from its owners. The concept defines
the area of interest of the accountant. Only those

UNDERLYING ASSUMPTIONS

Going Concern-The going concern assumption means that in the absence of

evidence to the contrary, the accounting entity is viewed as continuing in
operation indefinitely.

CHAPTER 2 FINANCIAL STATEMENTS

Definition

- Financial statements are the means by which the information accumulated and processed in financial
accounting is periodically communicated to the users.

Stated differently, the financial statements are the end product or main output of the financial
accounting
process

Financial statements are a structured financial representation of the financial position and financial
performance of an entity.

CHAPTER 2 FINANCIAL STATEMENTS

Components of financial statements

Complete set of financial statements comprises the following components:

Statement of financial position

2) Income statement

3) Statement of comprehensive income

4) Statement of changes in equity

5) Statement of cash flow

6) Notes, accompanying a summary of significant accounting policies and other explanatory notes.

CHAPTER 2 FINANCIAL STATEMENTS

Objective of financial statements

The objective of financial statements is to provide information about the

financial position, financial performance and cash flows of an entity is useful to
a wide range of users in making economic decisions.