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There are Six Basic Assumptions of
Accounting:
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Economic Business Entity
Going Concern
Monetary Unit
Time Period
Accrual Basis
Cash Basis
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All of the business transactions should be
separate from the business owner’s personal
transactions
There should be no combination of personal
funds with business funds.
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An organization will continue its operation for
foreseeable future.
The company will remain in business
indefinitely unless there is sufficient evidence
otherwise.
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This is the concept that a business should
only record transactions that can be stated in
terms of money only.
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The entity’s activities are separated into
periods of time such as months, quarters or
years.
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Transactions should be recorded in the
period in which it is occurred rather when
cash is received or paid.
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Transactions should be recorded when cash
is received or paid for that transactions
Assumptions
Question
Combining the activities of Kellogg and General Mills
would violate the
a. cost principle.
b. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.
1-9
LO 2
Assumptions
Question
Combining the activities of Kellogg and General Mills
would violate the
a. cost principle.
b. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.
1-10
LO 2
Assumptions
Question
Purchase a land for taka 50000 but no cash is paid.
Based on which assumption land should be purchased
a. Accrual Basis Assumption.
b. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.
1-11
LO 2
Assumptions
Question
Purchase a land for taka 50000 but no cash is paid.
Based on which assumption land should be purchased
a. Accrual Basis Assumption.
b. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.
1-12
LO 2
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Following Principles are used in Accounting:
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Historical Cost
Fair Value
Revenue Recognition
Matching
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Assets are recorded at historical cost or its
original purchase price.
For example, if a company purchases a
building for $500,000 it should be recorded
as such, and should remain on the books for
that amount until disposed of.
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FAIR VALUE PRINCIPLE states that assets and
liabilities should be reported at fair value (the
price received to sell an asset or settle a
liability).
For e.g. You bought a share at taka 10 on 1st
January. But 31st January value goes up to taka
12. Here share should be recorded at taka 12.
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All information relating to the operations and
financial position of the entity that make a
difference to financial statement users should
be disclosed.
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Revenue is earned and recognized upon
product delivery or service completion,
without regard to when cash is actually
received.
Example: A customer purchases inventory
from a company on credit. Even though no
cash has yet been received, the sale is
recorded.
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The matching principle requires that revenues
and any related expenses be recognized together
in the same period. Companies must match its
revenue with expenses.
In other words the matching principle states that
expenses should be recorded during the period
in which they are incurred, regardless of when
the transfer of cash occurs.
Example: A company orders goods on credit and
has 30 days in which to pay. This purchase is
recorded immediately, even though no cash has
been paid. By selling these goods company can
earn revenue thus expense is matched with
revenue.
Principles
Question
You have completed service but not received cash for that
service. Service should be recorded under
a. cost principle.
b. Revenue recognition principle.
c. monetary unit assumption.
d. ethics principle.
LO 2
Principles
Question
You have completed service but not received cash for that
service. Service should be recorded under
a. cost principle.
b. Revenue recognition principle.
c. monetary unit assumption.
d. ethics principle.
LO 2
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This term refers to the accounting guidelines
that creates limitation in preparing
accounting Information
They consist of:
◦ Cost Effectiveness:
◦ Materiality
◦ Conservatism
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The cost of providing accounting information
should not exceed the benefit of the
information it is reporting.
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States that the requirements of any
accounting principle may be ignored when
there is no effect on the decisions of the user
of financial information.
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Conservatism helps the accountant choose
between 2 equally likely alternatives, where
you have to choose that alternative which
understates asset & revenue
Constraints
Question
You have option to record your asset at taka 5000 or taka
15000. Which option will you choose under which
constraint?
a. Taka 5000, conservatism constraint.
b. Taka 15000, conservatism constraint
c. Taka 10000, monetary unit assumption.
d. Taka 2500, cost effectiveness constraint
LO 2