FINANCIAL ACCOUNTING - ASSUMPTIONS UNDERLYING ACCOUNTING MEASUREMENT

1. Financial
Accounting
Group I
Praveen Suresh
Shuba Bhandary
Shubhalaxmi
Mohd Tasleem
Sachin Kunnathu Institute of Managment & Information
St.Aloysius
Technology (AIMIT)
1

2. Topics Covered
1. Assumptions underlying
accounting
measurement
2. Users of accounting
information
St.Aloysius Institute of Managment & Information
Technology (AIMIT)
2

3. Data Source
Financial Accounting
A managerial
perspective by
R. Narayanaswamy
St.Aloysius Institute of Managment & Information
Technology (AIMIT)
3

4. Assumptions
underlying Accounting
Measurement
St.Aloysius Institute of Managment & Information
Technology (AIMIT)
4

5. 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

6. 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

7. Assumptions Underlying
Accounting Measurement
Accounting Entity
Going Concern
Periodicity
Money Measurement
St.Aloysius Institute of Managment & Information
Technology (AIMIT)
7

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. Users of Accounting
Information
St.Aloysius Institute of Managment & Information
Technology (AIMIT)
18

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. Questions
St.Aloysius Institute of Managment & Information
Technology (AIMIT)
26

27. Feedback/
Inputs
(Did we miss out anything?)
St.Aloysius Institute of Managment & Information
Technology (AIMIT)
27

28. Thank You
St.Aloysius Institute of Managment & Information
Technology (AIMIT)
28