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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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