FUNDAMENTAL ACCOUNTING ASSUMPTIONS or CONCEPTS

 

Fundamental Accounting Assumptions or Concepts are the assumptions which are presumed to have been preparing the annual accounts . The entities which do not follow any of the fundamental Accounting Assumptions are required to disclose which of these assumptions have not been followed and the reasons for not following them. Fundamental Accounting Assumptions are :

1. Going Concern  Assumptions ;

2. Consistency Assumptions ; and 

3. Accrual Assumptions.

Lets us discuss them in detail :

1 . Going Concern  Assumptions :

 According to this assumption , it is assumed that business shall continue for a for a foreseeable period and there is no intention to close the business or as scale down its operations significantly . This implies that it will not be dissolved in the immediate future unless there is a clear evidence of closure .it is because of this concept that a distinction is made between a capital expenditures  , i.e., expenditure that will give benefit for a long period and revenue expenditure ,i.e.,  

2. Consistency Assumptions :

 According to the Consistency Assumptions  , accounting practices once selected and adopted , should be applied consistently year after year. The concept helps in better understanding of accounting information and makes it camparable  with that of previous year . Consistency eliminates personal bias and helps in achieving results that are comparable . The concept is particularly important when alternative Accounting practices are equally acceptable . For example two methods of charging depreciation Written down value method and straight line value method , are equally acceptable .

3. Accrual Assumptions : 

According to the Assumptions , a transactions is recorded in the books of accounts at the time when it is entered into and not when the settlement takes place. Thus revenue is recognised when it is realised ,I,e, when sale is complete or services are rendered ; it is immaterial whether cash is received or not . Similarly , expenses are recognised as expense in the accounting period  in which the revenue related to is recognised whether paid in cash or not .

This concept is particularly important because it recognises the assets , liabilities , income and  expenses  as and when transactions relating to it are entered into . Under this concept , profit is regarded as earned as t the time the goods or services are sold to a customer ,i.e.the legal title is passed to the customer,who in turn , has an obligation to be pay for them , Similarly , expenses is regarded as incurred when the goods or services are purchased and as obligation to pay for them is assumed .