Assumptions in Accounting
- The Consistency Assumption
- The Going Concern Assumption
- The Time Period Assumption
- The Reliability Assumption
- The Economic Entity Assumption
Students who have earned an accounting degree will learn that accounting assumptions ensure that businesses both large and small operate smoothly, efficiently, and according to the standards set by the Financial Accounting Standards Board. When these assumptions are not followed, it can often lead to financial statements that are unsound. While there are several accounting assumptions that businesses will want to follow, the following five assumptions described below are considered to be some of the most important.
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1. The Consistency Assumption
One key accounting assumption is known as the consistency assumption. Under this assumption, it is important that companies make sure that they use the same accounting method across all accounting practices and accounting periods. The only exception to this assumption is the case in which a different method would be more relevant and efficient. Maintaining consistency in accounting methods will ensure that accounting records over several accounting periods can easily be compared.
2. The Going Concern Assumption
Another key accounting assumption that persons working towards an accounting degree will need to understand is the going concern assumption. This assumption assumes that the business in question will likely continue operating in the foreseeable future. It assumes that the company will not go bankrupt and will be able to meet its obligations and objectives. The going concern assumption presumes that the business will be operating beyond its next fiscal period, will complete its expected plans, and meet its projected goals.
3. The Time Period Assumption
According to the Financial Accounting Standards Board, another extremely important accounting assumption is the time period assumption. What this assumption means is that the accounting practices and methods used by a company should be maintained and reported for specific periods of time. These periods should also be consistent each year that the business is in operation. Time periods can be monthly, quarterly, biannually, or annually but must be consistent so that records can be compared over set time periods.
4. The Reliability Assumption
The reliability accounting assumption states that only transactions that can be proven should be recorded in accounting practices. And what this means is that businesses must be able to prove transactions through such things as receipts, billing statements, invoices, and bank statements. There must be some form of objective evidence of a transaction before the business can report it in its accounting records. This assumption is often known as the objectivity assumption.
5. Economic Entity Assumption
A key accounting assumption that is especially important for small businesses is the economic entity assumption. This assumption assumes that the accounting records of a business and the personal accounting records of the business’ owner will be kept separate. Business transactions should never be mixed with the business owner’s personal transactions in accounting practices. This issue is particularly problematic with small, family-owned businesses.
Accounting is a thriving field that is currently growing in demand. And for persons who would like to begin a career in this exciting field, they will need to learn about the five key accounting assumptions as described above.