UNDERLYING ASSUMPTIONS

ACCOUNTING ASSUMPTIONS
– Are the basic notions or fundamental premises
on which the accounting process is based.

– It serves as the foundation or bedrock of

accounting in order to avoid misunderstanding
but rather enhance the understanding and
usefulness of the financial statements.
 ACCOUNTING ASSUMPTIONS
– The new conceptual framework for financial
reporting mentions only one assumption which is
the GOING CONCERN assumption

– Implicit in accounting are the basic assumptions

of
• Accounting entity
• Time period
• Monetary unit
 GOING CONCERN
• In the absence of evidence to the contrary,
the accounting entity is viewed as continuing
in operation indefinitely.
• The FS are prepared that the entity will
continue in operations indefinitely.
• Thus, assets are recorded at cost
• This is the very foundation of the cost
principle
• Also known as the continuity assumption
 TIME PERIOD
• The indefinite life of an entity is subdivided into
time periods or accounting periods which are
usually of equal length for the purpose of
preparing financial reports on financial position,
performance and cash flows.
• The traditional accounting period is one year
because it is after one year that government
reports are required.
• The accounting period maybe:
– Calendar year or a natural business year
• A calendar year starts on January 1 and ends on December
31
• A natural business year is a 12 month period that ends on
any month when the business is at the lowest or
experiencing slack season.
 ACCOUNTING ENTITY
• The entity is separate from the owners,
managers and employees who constitute the
entity.

• The transactions of the entity shall not be

merged with the transactions of the owners.

• The reason for this assumption is to have a

fair presentation of FS.
 MONETARY UNIT
• It has two aspects namely
– Quantifiability
– Stability
 QUANTIFIABILITY
• means that the elements of the FS should be
stated in terms of a common financial
denominator/ unit of measure which is Peso
in the Philippines.
 STABILITY
• Stability of the Peso means that the
purchasing power of the peso is stable or
constant.

• The accounting function is to account for

pesos only and not for changes in purchasing
power.
 ACCRUAL ASSUMPTION
• Income is recognized when earned regardless
of when received and expenses are recognized
when incurred regardless of when paid.