Accounting Assumptions, Principles, and Constraints Checkpoint, Essay Example

Accounting is an art of recording, classifying and summarizing in a systematic manner, in monetary terms, transactions, or events that are financial in nature.

Assumptions of accounting.

The accounting entity.

It assumes that a business is a separate entity from its owners and any other business around it. Revenue collections from the business should therefore, be separate from other personal expenses.

Going concern.

It assumes that the business will be in existence for an indefinite time. This assumption will lose its validity if there exists assurance of liquidation of the business.

Principle of Monetary unit.

It assumes that accountants will keep their records using a specific, stable currency. In the United States, the standard unit of recording financial transactions is an adjusted dollar.

Time-period principle.

It assumes that we can classify economic activities of a particular enterprise into time periods, for example, annually (Bragg, 2011).

Accounting principles.

Historical cost principle.

It requires that companies should account and make reports basing on the purchasing costs, and not the present fair market values.

Accrual concept.

It requires that one should record revenue once a transaction is complete, and not when they receive cash

Matching principle.

It requires that one has to match expenses with their respective revenues. This principle allows for better evaluation of profitability of the firm (Bragg, 2011).

Accounting Constraints.

Objectivity principle.

The constraint requires that we provide all financial statements basing on specific objective evidence.

Materiality principle.

We consider an item significant once we obtain a report. This means that it should affect the decision of a reasonable individual.

Consistency principle.

It requires that the company maintain the same accounting principles in its recording and reporting every financial year (Walton, 2009).

In conclusion, putting into consideration all the above principles, constraints, and assumptions make accounting records more valid and easy to analyze. Thus, a sound financial reporting system should consider most of the above issues.

References

Bragg, S. M. (2011). Wiley GAAP 2012: Interpretation and Application of Generally Accepted Accounting Principles. New York: John Wiley & Sons.

Walton, P. (2009). An Executive’s Guide for Moving from US GAAP to IFRS. New York: Business Expert Press.