Fundamental Accounting Assumptions

There are mainly three fundamental accounting assumptions. They are - going concern, consistency and accrual.

Going Concern

 

Fundamental Accounting Assumptions

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Going concern is the first and foremost accounting assumption which is used while preparing financial statements. As per this assumption, entities will continue their operations in the foreseeable future. That means the company has enough funds to continue their operations in future, hence there is no need to liquidate. Based on this assumption, the financial statements are prepared.

Consistency

Fundamental Accounting Assumptions

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In order to prepare financial statements, entities should adopt certain accounting principles which are assumed to be followed consistently from one period to another. Thus, this concept helps to compare the results and performance of the entities over the years. For example, if straight-line method of depreciation is used on fixed assets, then it should be continued throughout the life of fixed assets. The changing of depreciation method will be treated as inconsistency except in certain conditions which are mentioned below. But, if entities use the policy to evaluate their inventory either at the cost price or at the market price whichever is lower and the company uses cost method for one year and market price for another year, then it is not treated as inconsistency Here the point is, whichever is lower, it is the measuring method of inventory. So, the inconsistency does not arise.

Hence, the accounting policies followed by entities should not be changed except in certain conditions. They are:

• To bring the accounting policies to be compliant with Accounting Standards issued by Boards.
• To make them compatible with the provisions of law.
• Or if the changing of accounting policies depict more true and fair picture of financial statements.

Accrual

Fundamental Accounting Assumptions

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While preparing financial statements, accrual concept is used. Based on this concept, the revenue and expenses are recorded in the year in which they occur irrespective of cash receipt or payment. Financial statements prepared on accrual basis reveal not just the past transactions that involve cash but the future obligation of payments and the accrual revenues in future. Thus, the financial statements must show all the transactions and events that occurred for that financial period. The accrual accounting entries are reversed after the cash payment or receipt.