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Accounting Assumptions
The International Accounting
Standards Committee (lASC) as well as the Institute of Chartered Accountants of
India (ICAI) treat (vide IAS-I & AS-I) the following as the fundamental
accounting assumptions:
(1) Going concern
In the ordinary course, accounting
assumes that the business will continue to exist and carry on its operations for
an indefinite period in the future. The entity is assumed to remain in operation
sufficiently long to carry out its objects and plans. The values attached to the
assets will be on the basis of its current worth. The assumption is that the
fixed assets are not intended for re-sale. Therefore, it may be contended that a
balance sheet which is prepared on the basis of record of facts on historical
costs cannot show the true or real worth of the concern at a particular date.
The underlying principle there is that the earning power and not the cost is the
basis for valuing a continuing business. The business is to continue
indefinitely and the financial and accounting policies are followed to maintain
the continuity of the business unit.
(2) Consistency
There should be uniformity in
accounting processes and policies from one period to another. Material changes,
if any, should be disclosed even though there is improvement in technique. A
change of method from one period to another will affect the result of the
trading materially. Only when the accounting procedures are adhered to
consistently from year to year the results disclosed in the financial
statements will be uniform and comparable.
(3) Accrual
Accounting attempts to recognize
non-cash events and circumstances as they occur. Accrual is concerned with
expected future cash receipts and payments: it is the accounting process of
recognizing assets, liabilities or income for amounts expected to be received or
paid in future. Common examples of accruals include purchases and sales of goods
or services on credit, interest, rent (not yet paid), wages and salaries, taxes.
Thus, we make record of all expenses and incomes relating to the accounting
period whether actual cash has been disbursed or received or not. If a
fundamental accounting assumption (i.e. Going concern, consistency and accrual)
is not followed (in the preparation of financial statements) the fact
should be disclosed. [AS-I para 27].
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