Accounting assumptions

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Accounting assumptions

  1. 1. RD1 Financial Reports Accounting Assumptions
  2. 2. Accounting Assumptions <ul><li>Accounting assumptions underlie the complete accounting process. </li></ul>
  3. 3. <ul><li>Assumptions are generally accepted or taken for granted without proof. Accounting assumptions are: </li></ul><ul><ul><li>Continuity – the business will continue indefinitely. When circumstances are known which make this assumption invalid, it is discarded. </li></ul></ul><ul><ul><li>Historical Cost – business transactions are recorded in terms of their cost at time the transaction occurred. Provides objective verifiable evidence of a transaction rather than subjective opinion liable to distortion </li></ul></ul>
  4. 4. <ul><ul><li>Entity – regards the business as being an entity separate from the owners. Transactions are recorded from viewpoint of the business not the owners. </li></ul></ul><ul><ul><li>Monetary – all transactions are recorded in the common monetary unit ie $. If items cannot be quantified in financial terms they are not recorded in the main records. These items can be disclosed in reports as footnotes. </li></ul></ul><ul><ul><li>Period – the life of a business is divided into arbitrary time periods. For external reporting purposes the time period is generally one year but can be varied for internal purposes. </li></ul></ul>

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