Key Assumptions
This assumption states the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business.
Periodicity Assumption
The increase in assets or decrease in liabilities resulting from the sale of goods or the performance of services in the normal course of business.
Revenue
This principle requires that companies disclose all circumstances and events that would make a difference to financial statement users. If an important item cannot reasonably be reported directly in one of the four types of financial statements, then it should be discussed in notes that accompany the statements.
Full Disclosure Principle
Information is said to have this value if it helps provide accurate expectations about the future
predictive value
Information has this quality if it is presented in a clear and concise fashion, so that reasonably informed users of that information can interpret it and comprehend its meaning.
Understandability
This assumption requires that only those things that can be expressed in money are included in the accounting records. This means that certain important information needed by investors, creditors, and managers, such as customer satisfaction, is not reported in the financial statements. This assumption relies on the monetary unit remaining relatively stable in value.
Monetary Unit Assumption
Resources owned by a business
Assets
This principle indicates that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability). Fair value information may be more useful than historical cost for certain types of assets and liabilities.
Fair Value Principle
Information is said to have this value if it confirms or corrects prior expectations
Confirmatory Value
Information must be available to decision-makers before it loses its capacity to influence decisions.
This assumption states that every economic entity can be separately identified and accounted for. In order to assess a company's performance and financial position accurately, it is important to not blur company transactions with personal transactions (especially those of its managers) or transactions of other companies.
Economic Entity Assumption
The cost of assets consumed or services used in the process of generating revenues.
Expenses
This principle dictates that companies record assets at their cost. This is true not only at the time the asset is purchased but also over the time the asset is held. For example, if land that was purchased for $30,000 increases in value to $40,000, it continues to be reported at $30,000.
Historical Cost Principle
Accounting information has this quality if it would make a difference in a business decision
In accounting, this quality results when different companies use the same accounting principles
comparability
This assumption states that the business will remain in operation for the foreseeable future. Of course, many businesses do fail, but in general it is reasonable to assume that the business will continue operating.
Going Concern Assumption
Payments of cash from a corporation to its stockholders.
Dividends
GAAP generally uses one of two measurement principles. Selection of which principle to follow generally relates to trade-offs between relevance and faithful representation.
Historical Cost and Fair Value Principles
This quality applies if information accurately depicts what really happened. Information must be complete , neutral , and free from error.
Faithful Representation
This quality means that a company uses the same accounting principles and methods from year to year.
Consistency
This constraint weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available
Cost constraint
Amounts owed to creditors in the form of debts and other obligations.
Liabilities
Historical Cost minus accumulated depreciation equals
Book Value
2 qualities:
1. Is not biased toward one position or another
2. Nothing important has been omitted
1. Neutral
2. Complete
Information is (This quality) if independent observers, using the same methods, obtain similar results.
verifiable