Accounting Assumptions, Principles, and Constraints
What are basic assumptions of accounting? They are monetary unit assumption; this is where it states that the only transaction data expressed in terms of money can be included in accounting records. Economic period assumption; which state that the activities of the entity be kept separate and distinct from the activities of the owner and of all other economic entities. Time period assumption; which states that the economic life of a business can be divided into artificial time periods, and going concern assumption; which assumes that the company will continue in operation long enough to carry out its existing objectives.
Principles of accounting are: Revenue recognition principle which dictates that companies should recognize revenue in the accounting period in which it is earned; matching principle which dictates that companies match expenses with revenues in the period in which efforts are made to generate revenue; full disclosure principle which requires companies to disclose circumstances and events that make a difference to financial statement user and cost principle which dictates companies to record assets at their cost.
The constraints of accounting are: materiality which relates to an item’s impact on a firm’s overall financial condition and operations and conservatism which dictates when in a company is in a doubt and…