StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Accounting Assumptions, Principles and Constrains - Essay Example

Comments (0) Cite this document
Summary
They are considered as cornerstones of the foundation of accounting (Pratt, 2011) and they include Economic Entity which is the financial statements that…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER91% of users find it useful
Accounting Assumptions, Principles and Constrains
Read TextPreview

Extract of sample "Accounting Assumptions, Principles and Constrains"

Accounting Assumptions, Principles and Constrains The basic assumptions of accounting Basic accounting assumptions provide a foundation for recording the transactions and preparing the financial statements. They are considered as cornerstones of the foundation of accounting (Pratt, 2011) and they include Economic Entity which is the financial statements that presume that accounts often deal with a single organization. However, its application usually gets delicate when the involved parties want to cut down the financial statements to understand a particular product or division within the organization. The second assumption is going Concern that assumes that the economic entity has a significant past and future for purposes of recording costs of assets and inventory and decision making based on those costs in the present. Additionally, there are the Monetary Unit assumptions that keeps score with money, but it typically ignores inflation and deflation of currencies; the value and unit of currency are understood to be firm; otherwise, there is transaction with global divisions that uses other currencies besides the U.S. Dollar. Finally there is an accounting Periods assumption that assumes that the periodical accounting periods is applicable and accountants can stop to analyze financial statements.
Accounting Principles
Historical Costs (assets and liabilities) characteristically report on the chronological cost and then adjusted to fair market value when the needs of reporting require it. However, the cost of assets went up some years thereby did not reflect what it is worth to other buyers or the cost of replacement. (Riahi-Belkaoui, 2005).  Revenue Recognition is the recording of revenues when they are realized and earned. (Pratt, J. 2011). This is one of challenge that accrual-based accounting is trying to solve. Notably, receiving cash from a sales order doesn’t mean that everything has to earn the revenue especially when they are shipped. In other words, it is sometimes possible to sell goods or services without receiving cash. Therefore, Matching Expenses to Revenues means matching fixed cost of the revenues or recording profit in the income statement based on the best profit on revenues and expenses. This often leads to Full Disclosure where accountants record and report every bit of information in the numbers and footnotes of financial statements that fairly represent the activities of the business entity in that accounting period. This procedure is perfect; however, for decision-making it is expected to leave out or add things that are relevant to the decision being made.
Accounting Constraints
In most cases, Cost and Benefit is often a Paradox since in every event there is a real cost of recording and reporting accounting information. Therefore, some very important events relevant to a business may fail to be disclosed because it was too expensive to gather required or relevant data and this often lead to a major accounting constrain. Therefore, there is a need to understand financial statements and add information to which we have access so as to make the best decisions. Another constraint is the Materiality – small financial events are very important as compared to large financial events for the typical, reasonable reader of financial statements (Pratt, J. 2011). However, the involved parties might differ in the decision making process considering financial statements are often understood differently by the accounting folks; some small financial event may fail to be disclosed even though it is very relevant to decision making processes. Finally, Industry Practice often leads to accounting constrains. Sizes and types of organizations often affect reporting financial activities. Some industries have special ways of distributing the products/services to customers; thus, it is never comprehensive for the all accountants to analyze and automobile manufacturer equally.
Nonetheless, an ideal accounting practice requires that the Generally Accepted Accounting Principles (GAAPs) be followed to the letter and the accounting assumptions be observed. This would facilitate systematic continuity and consistency of the financial records of various business entities. The related accounting constraints should also be addressed accordingly in order to avoid unnecessary shortcomings and erroneous actions.
Reference
Riahi-Belkaoui, A. (2005). Accounting theory. London: Thomson.
Pratt, J. (2011). Financial accounting in an economic context. Hoboken, NJ: Wiley. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Accounting Assumptions, Principles and Constrains Essay”, n.d.)
Accounting Assumptions, Principles and Constrains Essay. Retrieved from https://studentshare.org/miscellaneous/1615087-accounting-assumptions-principles-and-constrains
(Accounting Assumptions, Principles and Constrains Essay)
Accounting Assumptions, Principles and Constrains Essay. https://studentshare.org/miscellaneous/1615087-accounting-assumptions-principles-and-constrains.
“Accounting Assumptions, Principles and Constrains Essay”, n.d. https://studentshare.org/miscellaneous/1615087-accounting-assumptions-principles-and-constrains.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF Accounting Assumptions, Principles and Constrains

Principles of accounting

...? Accounting Accounting This essay focuses on the principles of accounting in business. Accounting refers to awell-organized recording, coverage, and examination of monetary transactions of a venture (Grossman & Livingstone, 2009). The area of concern in this paper is the use of Activity-Based Costing (ABC). In brief, ABC refers to a costing system used in assigning costs to various goods and services in the business world (Grossman & Livingstone, 2009). In this paper, Super Bakery Inc. acts as a practical demonstration of how the system can determine the costs in a real life situation. Historically, ABC came into use in the 1980s due to lack of...
2 Pages(500 words)Research Paper

The Main Accounting Principles

...?Client’s 7 August Accounting is a very interesting and the main accounting principles have been widely adapted by severalcompanies, important aspects like debt, equity, balance sheet, profit and loss statement and so on are considered to be very important. These are also tools which show how well a company is performing, there have been instances of declaring false information so that the share of a particular company performs well in the stock market, such fraudulent instances have also occurred in the past. This paper will shed light upon how JP Morgan Chase has modified their accounting principles in the past and what impact has the same had on their...
7 Pages(1750 words)Essay

Principles of Accounting

In simple terms accounting can be also referred to as “the language of business” because of its role that helped in recording and processing the financial information that the firm requires for management purpose (Mukherjee & Hanif, 2003; Galanza, 1995). The main purpose of accounting is to provide financial information that is required by an economic unit to enhance the efficiency of its operations. The tern economic entity not only signifies a business unit but also the entities that are operating without the purpose of profit-making like the public charities, clubs, churches and government bodies. The accounting information helps in decision making in the organization. For instance decision like availability of...
10 Pages(2500 words)Essay

Financial Accounting principles

...of assets possessed by the business. 6. The nature and value of liabilities. 7. Customer who owe to the business and the amount in each case 8. Suppliers to whom the business has to make payments. 9. Other facts for filling various returns for external use, e.g. income tax, sales tax, duty, etc. We have to keep all these factors in mind and prepare the accounts based on the accounts standards and principle. Definition of AccountingAccounting is defined as the 'the art of recording, classifying and summarizing in terms of money transactions and events of a financial character and interpreting the results thereof .' The American...
7 Pages(1750 words)Essay

Principles of Accounting SLP

...red flags that can be used to identify the potential fraud in this item Huge rise in revenues without any rise in cash flows or account receivables. Complex and unusual transactions near the end of the accounting period Showing very strong sales when the competitors are have weak or falling sales Improper Asset Valuations The corporate can use several schemes to overstate their assets at a certain period of time. Altering the useful lives of the assets Manipulating the fair market values to their advantage Influencing reserves to their advantage There are certain red flags that can be used to identify the potential fraud in this item Reporting earnings growth while having negative operating cash...
2 Pages(500 words)Essay

Basic Principles of Accounting

...Question PART A Net Profit is calculated by subtracting the business’ total expenses from revenue in the period between 1st July 2007 and 30th June, 2008. It is more complicated than just subtracting cash at the beginning from cash at the end of the period. This is because in accounting, we try to get a total picture at the given period in time so ‘profits’ need to include goods sold on credit and other important activities like taxation. Basing everything on cash will be misleading and even go against accounting convention. 2. Accounts are prepared according to the Historical Cost Convention. The convention states that items recorded in financial statements should be recorded at the...
4 Pages(1000 words)Essay

ACC201:PRINCIPLES OF ACCOUNTING

...information provided in the previous two sentences to prepare an income statement for 2003 and balance sheet as of December 31, 2003. Solution a) Percentage Growth in Net Income (2002): Net Income in 2002 – Net Income in 2001 Net Income in 2001 $200,000 – $120,000 $120,000 66.67 percent In the year 2002, annual net income of MIC increased remarkably by 66.67 percent due to an infrequent gain from the Lottery win – an extraordinary item. Since the gain of $62,000 from Lottery was an unexpected / extraordinary gain, it shouldn’t be accounted for in the expected income for next years. Stakeholders, thus, can’t expect the income growth for the year 2002-2003 as high as 67 percent. b) It can be seen in the Balance...
2 Pages(500 words)Coursework

Accounting Principles

...Accounting Principles No: Introduction Accounting is a procedure, which allows its users, managers and shareholders to communicate all the financial information of a business. The simple and easiest way of communicating about the financial information is in the form of financial statements and presenting all financial information in the financial statement shows in money terms the economic resources under the control of management. Each of the business entities keeps principles of accounting in three ways; accounting, book keeping and auditing and all these are the basic principles lie under the head of...
4 Pages(1000 words)Essay

Generally Accepted Accounting Principles

...Generally Accepted Accounting Principles What are GAAP GAAP is the abbreviated form of Generally Accepted Accounting Principles that refers to the accounting standards that are to be followed in the process of financial accounting. The standards of accounting provide the guidelines to accountants in the preparation of financial statements and accounts in the jurisdiction and laws of any country. The conformance to the International Financial Reporting Standards, rules and conventions under GAAP leads to recording, summarization and reporting of financial statements that are comparable in...
2 Pages(500 words)Essay

Accounting Principles

...to be a very good seller. The pricing structure and cost structure changed when the new product Bush Bashers was introduced. BB is a higher quality product which has actually been selling extremely well. Despite the good sales the profit margins of the company are down and Sandra wants to find the root of the problem. Since the introduction of the new the product the company has separate production lines for the two products, but the enterprise is still utilizing a cost mechanism based on the prior cost assumption before the arrival of Bush Bashers. One of the key assumptions is that direct labor is the cost driver that determines the overhead rate to be allocated to the cost of the product. Sandra...
6 Pages(1500 words)Term Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic Accounting Assumptions, Principles and Constrains for FREE!

Contact Us