Accounting Assumptions and Principles

- Mehek Bengani
 Accounting Assumption
• Going Concern Assumption
• Consistency Assumption
• Accrual Assumption
Going Concern Assumption
• An accounting guideline which allows the readers of financial statements to assume that
the company will continue on long enough to carry out its objectives and commitments. In
other words, the accountants believe that the company will not liquidate in the near
future.
 Consistency Assumption
• In accounting, consistency requires that a company's 
financial statements follow the same accounting
principles, methods, practices and procedures from
one accounting period to the next. This allows the
readers of the financial statements to make meaningful comparisons between years.
• Consistency does allow a company to make a change to a more preferred accounting
method. However, the change and its effects must be clearly disclosed for the benefit of
the readers of the financial statements.
Accrual Assumption
• According to this assumption a transaction is recorded in the books of accounts at the
time when it is entered into and not when the settlement takes place.
• The revenue is recognized when it is realized, i.e., when sale is complete or services are
rendered; it is immaterial whether cash is received or not.
 Accounting Principles
• Accounting Entity or Business Entity Principle
• Money Measurement Principle
• Accounting Period Principle
• Full Disclosure Principle
• Materiality Principle
• Prudence or Conservation Principle
• Cost Concept or Historical Cost Principle
• Matching Concept or Matching Principle
• Dual Aspect or Duality Principle
• Revenue Recognition Concept
• Verifiable Objective Concept
Accounting Entity or Business Entity Principle
• According to this principle, business id considered to be
separate and distinct from its owners. Owners being regarded
separate and distinct from business they are considered
creditors of the business to the extent of the capital
(because the owner gives the capital).

Money Measurement Principle

• According to this principle, transactions and events that can be measured in money terms
are recorded in the books of accounts of the enterprise.
• However this principle has two limitations:
a) Transactions and events that cannot be measured in money
terms are not recorded in the books of accounts, no matter how
important they are to the enterprise.
b) The value of money is considered to have static value as the
transactions are recorded at the value on the transaction date.
 Accounting Period Principle
• According to this his principle, the life of an enterprise is broken into
smaller periods so that its performance is measured at regular intervals
(usually 1 year).

Full Disclosure Principle

• Apart from legal requirements, good accounting practices all material and
significant information should be disclosed. For example reason for low
turnover should be disclosed

Materiality Principle
• It refers to the importance of an item or an event. According the American
Accounting Association “an item should be regarded as a material if there is a reason to believe
that knowledge of it would influence the decision of an informed investor.” Thus is means that is a
matter of exercising judgment to decide which item is material and which item is not, and only
those items should be disclosed that have significant effect or are relevant the user.
 Prudence or Conservation Principle
• It takes into consideration all prospective losses but not the prospective profits. The
application of this concept ensures that the financial statements present a realistic picture
of the state of the affairs of the enterprise and do not paint a better picture then what it
actually is.
Cost Concept or Historical Cost Principle
• An asset is recorded in the books of accounts at the price paid to
acquire it and the cost is the basis for all subsequent accounting of
the asset. Asset is recorded at cost depreciation. The market value of
an asset may change with the passage time but for accounting purposes it continues to be
shown in the books of accounts at its book value.
Matching Concept or Matching Principle
• It is based on the accounting period concept. It is
necessary to match ‘revenues’ of the period with the
‘expenses’ of the period to determine the correct
profit (or loss) for the accounting period.
 Dual Aspect or Duality Principle
• According to this aspect ever transaction entered into by an
enterprise has two aspects, a debit and a credit of equal amount.

Revenue Recognition Concept

• According to this concept revenue is considered to have
been realized when a transaction has been entered into
obligation to receive the amount has been established. It
is noted that recognizing revenue and receipt of an
amount are two separate aspects.

Verifiable Objective Concept

• The concept holds that accounting should be free from personal
bias. Measurements that are based on verifiable evidences are
regarded as objectives. It means all accounting transactions
should be evidenced and supported by business documents.
These supporting documents are cash memo, invoices, sales bills
etc.
Thank You