ACCOUNTING ASSUMPTIONS PAGE …. What is it all about?

UBS PROJECT ASSUMPTION PAGE

OBJECTIVE: 

The main objective of the Assumption Page is to state the assumptions for any transactions included in the UBS system but 'DOES NOT HAVE' the supporting of source documents.

For the UBS Project that we have done, the Accounting Assumptions Page include the followings.

Firstly, there are a few transactions which are required for the Projects where the Company we have selected do not provide us with enough documents These documents include Rent, Salaries and Capital.  We try to collect and gather all these information related with their business to find evidence about past history data and other types of information such as their missing documents on expenses. This was mainly done through interviews with the Owner of the Company. For examples, we asked the owner as to how much usually their electricity and water consumption used by the company for those missing electricity and water bills during the chosen period for the project

The company we have chosen operates a mini mart and thus the other accounting assumption is that sales by the company are all in cash terms in Ringgit Malaysia (RM). As such, there are no debtors.

       

BASIC ACCOUNTING ASSUMPTION

Hello friends. Today I would like to share information about the basic Accounting Assumptions.

Assumptions are traditions and customs, which have been developed over a period of time and well-accepted by the profession.

Assumptions in accounting provide a basis in preparing, presenting and interpreting financial statements. These assumptions are held true when accountants prepare the financial statements and when users read them. In effect, accounting assumptions provide a level of foundation to help prevent misunderstandings between and among accountants and users.

There are four basic assumptions that are considered as cornerstones of the foundation of accounting. 

These are: 

      Accounting entity assumption

      Money measurement assumption

      Going concern assumption

      Accounting period assumption

Accounting Entity Assumption

Basically, the accounting entity assumption is the same as the business entity principle. In this system, a business firm is considered a separate and distinct entity from its owner.

Accounting entity assumption states that the activities of a business entity be kept separate from its owners and all other entities. In other words, according to this assumption business unit is considered a distinct entity from its owners and all other entities having transactions with it.

This assumption enables the accountant to distinguish between the transactions of the business and those of the owners. Consequently, the capital brought into the business and withdrawals from the business by the owners will also be recorded in the same manner as that of transaction with other entities. 

For example, if the owner brings in cash or any other asset, it will result in increase in assets of the business and capital of the firm. This capital represents firm's liability to the owner. The expenses of the owner paid by the firm assets are recorded as withdrawals from the business. This means the profit and loss account will show the revenues and expenses related to the business entity only. Consequently, balance sheet will show the assets and liabilities of the business entity only. This assumption is followed in all organizations irrespective of their form, i.e., sole proprietorship, partnership, cooperative, or company.

 Accounting Entity Assumption or Business Entity Assumption

The business is a separate entity from its owners

Money Measurement Assumption

This assumption requires use of monetary unit as a basis of measurement, i.e., the currency of the country where the organization is to report its operations. This implies that those transactions which cannot be measured by monetary unit will not be recorded in the books of accounts. Monetary unit is supposed to provide a common yardstick to measure the assets, liabilities and equity of the business. It also indicates that certain information; howsoever important it may be to state the true and fair picture of the entity, will not be recorded in the financial accounting books if it cannot be expressed in terms of money..

Examples of monetary units are the Ringgit in Malaysia, the dollar in the United States,; the pound sterling in the United Kingdom; the Euro in EU Yen in Japan, the peso in Mexico, etc

Money Measurement Assumption

Only those transactions that are measured in monetary value are recorded

Going Concern Assumption

The financial statements are prepared assuming that the business will have an indefinite life unless there is evidence to the contrary. The business is called 'going concern' thereby implying that it will remain in operation in the foreseeable future. Since, this assumption believes in continuity of the business over indefinite period, it is also known as continuity assumption.

These assumptions:

-  Assumes that a business will continue to operate for the foreseeable future

-  Allows cost and revenues to be allocated to future accounting period

-  Provide a more realistic value of business assets

-  Allow fixed assets to be written off proportionally over their useful life

 Accounting Period or Periodicity Assumption

 A component of providing relevant and useful information is that it must be timely. Useful information must reach decision makers frequently and promptly. To provide timely information, accounting systems prepare reports at regular intervals. This results in an accounting process impacted by the periodicity (or time period) principle. The accounting period or periodicity assumption is that an organization’s activities can be divided into specific time periods such as monthly, quarterly, half yearly or yearly. One its uses is that comparison can be made in performance with like-for-like periods 

Accounting Period Assumption

The indefinite life of a business entity is divided into accounting periods for the purpose of preparing financial reports.