Assignment One.

Economic entity assumption

It refers to the separation between various divisions in a company. Each unit maintains its own
accounting records specific to the business operations. External stakeholders like; Governments
and investors use a company’s financial records to assess its performance. Hence, it is important
that the transactions reflect the activities of the entity accurately. According to the economic
entity assumption, a person evaluating a company’s records assumes all the transactions
pertaining to the business are being reviewed.
Monetary unit assumption
The monetary unit assumption principle dictates that all financial activity be recorded in the
same currency. It is the reasoning behind why you have to complete your
business bookkeeping for foreign transactions. Moreover, another assumption under this basic
accounting principle is that the purchasing power of currency remains static over time. In other
words, inflation is not considered in the financial reports of a business, even if that business has
existed for decades.
Specific time period assumption
The specific time period assumption requires that a business’ financial reports show results over
a distinct period for comparisons. Additionally, this accounting principle specifies that all
financial statements must indicate the specific time period that they’re considering for review, on
the actual document. It is because of this principle that your balance sheet always reports
information as of a certain date and your profit and loss statement encompasses a date range.
Cost principle
Cost Benefit Principle – limits the required amount of research and time to record or report
financial information if the cost outweighs the benefit. Thus, if recording an immaterial event
would cost the company a material amount of money, it should be forgone. This basic
accounting principle is important because it reminds business owners not to confuse cost with
value. Although the value of items and assets changes over time, the gain or loss of your assets is
only reflected in their sale or in depreciation entries. If you need a true valuation of your business
without selling your assets, then you’ll need to work with an appraiser, as opposed to relying on
your financial statements.
Full disclosure principle
This principle requires that any knowledge that would materially affect a financial statement
user’s decision about the company must be disclosed in the footnotes of the financial statements.
This prevents companies from hiding material facts about accounting practices or known
contingencies in the future. Basically, this principle states that all financial activities related to
the company must be presented accurately, without any hidden numbers to the business
owner/accountant, to ensure full transparency to business’ finances.
Going concern principle
Also referred to as the “non-death principle,” the going concern principle assumes the business
will continue to exist and function with no defined end date—meaning the business will not
liquidate in the foreseeable future. It is because of this basic accounting principle, why you defer
the recognition of expenses to a later accounting period.
Matching principle
This principle states that all expenses must be matched and recorded with their respective
revenues in the period that they were incurred and not when they are paid. This principle works
with the revenue recognition principle ensuring all revenue and expenses are recorded on an
accrual basis. These expenses can include wages, sales commissions, certain overhead costs, etc.
That being said, even if your tax return is based on the cash method of accounting, your
accountant may prepare your financial reports using the accrual basis of accounting. Ultimately,
accrual-based reports not only reflect the matching principle but also provide a better analysis of
your business’ performance and profitability than cash-based statements.
Revenue recognition principle
This principle requires companies to record revenue when it is earned instead of when it is
collected. This accrual basis of accounting gives a more accurate picture of financial events
during the period. The purpose of this principle is to accurately report an income or revenue
when the sale is made, even the payment is received at a later stage. With this basic accounting
principle, your business could earn a monthly revenue even if you haven’t received any actual
cash that month.
Materiality principle
This principle highlights an accountant’s ability to exercise judgment and use their professional
opinion since businesses come in all sizes, an amount that might be material for one business
may be immaterial for another and it’s up to the accountant to make this decision. When an
accountant is reconciling a set of books or completing a business tax return, if, during that time
the accountant finds any misses or discrepancy, they may deem it as immaterial. In such a
scenario, it’s up to the accountant to use their professional judgment to determine if the amount
is immaterial.
Principle of conservatism
When there’s more than one acceptable way to record a transaction, the principle of
conservatism instructs the accountant to record expenses and liabilities as soon as possible, but to
only record revenues and gains when they occur. Using this accounting principle, then, your
accountant will be more likely to anticipate losses in your reports, but not revenues or profits
hence they’re being more conservative with the business’s financial success. It’s important to
understand, however, that this basic accounting principle is only invoked when there are multiple
acceptable ways for the accountant to record the transaction. The principle of conservatism does
not allow a business accountant to completely disregard other accounting principles.
Reference
https://opentextbc.ca/principlesofaccountingv1openstax/chapter/describe-principles-
assumptions-and-concepts-of-accounting-and-their-relationship-to-financial-statements/
https://tallysolutions.com/accounting/basic-accounting-assumptions-basis-bookkeeping/