An Overview of Accounting Assumptions

Accounting assumptions refer to a set of rules which help in ensuring that the company has conducted its business operations effectively by complying with the applicable standards. By doing so, business owners and the accountants from an accounting firm in Johor Bahru will be able to record and present reliable, valuable and consistent information based on the rules. 

Besides, the accounting assumptions specify the mechanism for the process of reporting financial transactions in a company’s financial statements. These rules require the business owners to run their business and report their business affairs according to the applicable standards. Accounting assumptions aim to provide the readers of financial statements with a basis of constancy so that they can use it to evaluate the authenticity of the company’s financial data as well as to confirm its financial health. 

Some examples of accounting assumptions are as follows: 

Consistency Assumption 

According to this assumption, business owners should implement a consistent way of accounting (Also see A Closer Look at Managerial Accounting) throughout all accounting periods. By doing so, they will be able to compare the company’s financial statements for different periods easily. 

Economic Entity Assumption 

Some people may call this assumption as the business entity assumption. It makes a velar separation between the company and its owner. This indicates that this assumption keeps the company’s financial records and the owner’s personal financial records separated. 

Going Concern Assumption 

Also known as the continuity assumption, the going concern assumption states that a company will continue existing and running its business operations for an unforeseeable future. It assumes that an organisation will never go bankrupt and will be able to run the business for an indefinite period. 

Money Measurement Assumption 

According to this assumption, all entities should record all the transactions that are worth-recording and express them in monetary terms. It helps in enhancing the readers’ understanding of the financial position of a business. 

Reliability Assumption 

The reliability assumption states that the companies should only record the accounting transactions that it can prove easily. This means that it can only record financial transactions that others can verify by using the receipts, invoices, bank statements and billing statements in its financial statements. This helps in ensuring that the company has used the most accurate information it has to record those transactions. 

Time Period Assumption 

This assumption (Also see Accounting Period Assumption and Matching Principle: Understand their Relationship) requires a company to report and maintain the accounting methods and practices it uses for a certain period. It should make sure that these periods stay unchanged for each year. This is to let the users of the financial statements make comparisons between different periods. 

The accounting assumptions can bring a lot of advantages to the company itself, its management as well as the investors. These assumptions enable the investors to access the authenticity of the financial statements of a certain company before they can determine the actual financial (Also see How to Avoid Financial Ruin?) health of a company. Thus, they can make important decisions accordingly without having to worry that they are manipulated by an inaccurate representation of business transactions in those statements. 

Besides, the management of a company will be able to know the true and fair view of the company’s financial health. Thus, the management will be able to make suitable decisions so that the company can improve its performance. This would be helpful for the company to reach its short-term and long-term business goals.