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Assumptions underlying accounting measurement
 

Assumptions underlying accounting measurement

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FINANCIAL ACCOUNTING - ASSUMPTIONS UNDERLYING ACCOUNTING MEASUREMENT

FINANCIAL ACCOUNTING - ASSUMPTIONS UNDERLYING ACCOUNTING MEASUREMENT

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    Assumptions underlying accounting measurement Assumptions underlying accounting measurement Presentation Transcript

    • Financial Accounting Group I Praveen Suresh Shuba Bhandary Shubhalaxmi Mohd Tasleem Sachin Kunnathu Institute of Managment & Information St.Aloysius Technology (AIMIT) 1
    • Topics Covered 1. Assumptions underlying accounting measurement 2. Users of accounting information St.Aloysius Institute of Managment & Information Technology (AIMIT) 2
    • Data Source Financial Accounting A managerial perspective by R. Narayanaswamy St.Aloysius Institute of Managment & Information Technology (AIMIT) 3
    • Assumptions underlying Accounting Measurement St.Aloysius Institute of Managment & Information Technology (AIMIT) 4
    • Need for assumption  Mahesh a cloth merchant, goes on a picnic with      his family and spends Rs.10,000/- there. Since this event does not affect business position, it will not be recorded in the books of business. Everyone, who is recording transactions, accepts these as given truths (taken for granted) Thus, Accounting Assumptions may be defined as: Basic postulates or assumptions which serve the basis of actual recording. These assumptions help in solving the difficulties faced while recording business transactions. These have been derived through reason & based on experience. St.Aloysius Institute of Managment & Information Technology (AIMIT) 5
    • Accounting Measurement  Accounting involves the measurement and communication activities of economic  Accounting measures business transactions and other events that effect the financial position of the enterprise. St.Aloysius Institute of Managment & Information Technology (AIMIT) 6
    • Assumptions Underlying Accounting Measurement Accounting Entity Going Concern Periodicity Money Measurement St.Aloysius Institute of Managment & Information Technology (AIMIT) 7
    • Accounting Entity (Business is distinct from owner) Business is treated as an accounting entity which is seperate from its owners and from other firms St.Aloysius Institute of Managment & Information Technology (AIMIT) 8
    • Accounting Entity (Example-1)  Mr. Rahul owns a medical store. The store should maintain separate accounting records.  Mr. Rahul may own a house, car etc., he may also have availed housing loan, credit cards. But these assets and loans cannot be apart of his store accounting books/records.  He may also own a departmental store. But he has to maintain a separate set of record. And these two businesses cannot be mixed and should be kept separate. St.Aloysius Institute of Managment & Information Technology (AIMIT) 9
    • Accounting Entity (Example-2)  An accounting entity may be a separate legal enterprise distinct from other enterprises.  For example ICICI Bank, ICICI Securities, ICICI Prudential, Prudential ICICI, are all owned by ICICI bank but are separate legal enterprises and prepare their own financial statements.  An accounting entity can be a group of interconnected enterprises.  For Example – Separate financial statements of the ICICI Group can be consolidated for presenting the activities of the group St.Aloysius Institute of Managment & Information Technology (AIMIT) 10
    • Accounting Entity THUS THE DEFINITION OF ACCOUNTING ENTITY DEPENDS ON THE PURPOSE AND CONTEXT OF FINANCIAL REPORTING. St.Aloysius Institute of Managment & Information Technology (AIMIT) 11
    • Going Concern (Business is a continuing enterprise)  It is assumed that business is a continuing enterprise.  Assumption states that business will have indefinite life unless it is likely to be sold in the near future.  Assumption is also based on the fact that the majority of the business enterprise do survive in spite of many business failures. St.Aloysius Institute of Managment & Information Technology (AIMIT) 12
    • Periodicity (Business activities divided into periods)  Suppose you carry on a business.  Main objective of business = profit  When will you ascertain profits?  Divide the indefinite period(remember business is a going concern) into small periods and at the end of this small period you calculate business profits.  How does the above exercise help you?  You can make decisions like a) Whether to continue in business; b)whether business should be expanded; c)if profits are less what should be done to increase them St.Aloysius Institute of Managment & Information Technology (AIMIT) 13
    • Periodicity (Business activities divided into periods) •Profit means income earned at the end of the business. •Periodical ascertainment of profit earned during that period is important •Hence the necessity to assess profit after fixed time period arises •Transactions are recorded in books of accounts on the assumption that profit out of these transactions is to be ascertained for a specified period. •This is known as PERIODICAL ASSUMPTION OF ACCOUNTING St.Aloysius Institute of Managment & Information Technology (AIMIT) 14
    • Periodicity (Business activities divided into periods) •In periodicity assumption, indefinite life of business is divided into parts. These parts are known as accounting periods. •Normally one year is taken as a accounting period •In U.S accounting year is generally from Jan 1 – Dec 31. (Calender year) & In India it is April 1 – Mar 31 (of the next year) (financial year) •Periodicity assumption assumes that expenses & revenues are identified with a specific account period usually a year. •The assumption of Account Period is so important that even government charges tax on business once in a year •Even third parties dealing with business like banks like to know profits of a business for a particular period. St.Aloysius Institute of Managment & Information Technology (AIMIT) 15
    • Money Measurement (Money is a stable measurement unit) •On a particular day, a business concern purchases 1 office table, 1 fan & 10 liters of diesel. •How will the accountant record all these items? •How will the table, fan & diesel entered in the books? These items have been measured in different units •If these are brought to a common unit of measuring, their recording and reporting will be easy. •Such a common unit of measuring for all business transactions in accounting is MONEY. •That is why business transactions are monetary in nature. •Therefore only those transactions which are expressed in terms of money are recorded in business. •If a transaction is not measurable in terms of money it will not be recorded in the books of accounts. •This is known as Money Measurement Assumption. St.Aloysius Institute of Managment & Information Technology (AIMIT) 16
    • To Sum Up •These assumptions help in solving the difficulties one faces while recording business transactions. • It helps in ascertaining true position of business. •It facilitates recording & reporting business transactions from business point of view. •It serves the basis for accounting concepts. •Facilitates preparation of financial statements. •It is because of assumption that Business can be judged for its capacity to earn profits. •It ensures outsiders the continuity of business activities over an indefinite period of time. St.Aloysius Institute of Managment & Information Technology (AIMIT) 17
    • Users of Accounting Information St.Aloysius Institute of Managment & Information Technology (AIMIT) 18
    • Accounting Information  Accounting provides information that is useful in making business and economic decision  It is a principal means of communicating financial information to those who have an interest in an enterprises.  Accounting information is useful in making a number of decisions that affect the income or wealth of individuals or organizations.  Accounting reports are designed to meet the common information needs of most decision makers St.Aloysius Institute of Managment & Information Technology (AIMIT) 19
    • Accounting Information includes        Balance Sheet Income Statement Cash Flow Statement P&L A/c Statement of retained earnings. Annual Reports Tax Reports St.Aloysius Institute of Managment & Information Technology (AIMIT) 20
    • Users of Accounting Information  Users of information produced by the accounting system of a firm are broadly classified into 2 categories  INTERNAL USERS  EXTERNAL USER St.Aloysius Institute of Managment & Information Technology (AIMIT) 21
    • Users of Accounting Information Internal Users (termed as Managers)      Managing Directors Marketing Managers Production Managers Materials Managers Financial Controllers St.Aloysius Institute of Managment & Information Technology (AIMIT) 22
    • Users of Accounting Information Internal Users •Planning •Controlling operations •What to produce? • Whether it is feasible to produce •Change in production. •Pricing •Budgeting •Evaluate potential investment projects •Comparison with competitors •Take over •Purchase decisions •To determine value of firm. St.Aloysius Institute of Managment & Information Technology (AIMIT) 23
    • Users of Accounting Information External Users         Investors Lenders Security Analysts & Advisers Employees Suppliers & Trade Creditors Customers Government Public St.Aloysius Institute of Managment & Information Technology (AIMIT) 24
    • Users of Accounting information External Users  Investors:- Return on investment, Risk, Buy or Sell  Lenders:- Financial Stability, Interest Servicing capacity,       Repayment capacity, Security Security Analysts & Advisers:- Assistance to above two sector, Rating, Research, When to buy or sell Employees:- Stability, Profitability, Source of income, Wage negotiations. Suppliers & Trade Creditors:- Major customer, credit payments, production. Customers:- Honor warranty, Service issues, product input information. Government:- Legitimacy, Regulate business practice, Tax, production, demand & supply, national income, export Public:- Environment, Locality prosperity, Employment. St.Aloysius Institute of Managment & Information Technology (AIMIT) 25
    • Questions St.Aloysius Institute of Managment & Information Technology (AIMIT) 26
    • Feedback/ Inputs (Did we miss out anything?) St.Aloysius Institute of Managment & Information Technology (AIMIT) 27
    • Thank You St.Aloysius Institute of Managment & Information Technology (AIMIT) 28