4. GENERAL ACCEPTED ACCOUNTING
PRINCIPLES
A collection of rules and procedures and conventions that define accepted
accounting practice, includes broad guidelines as well as detailed procedures.
Relevant Information
Affects the decision of
its users.
Reliable Information
Is trusted by users.
Comparable
Information
Used in comparisons
across years &
companies.
5.
6. STABLE DOLLAR ASSUMPTION
• The stable dollar
assumption when using
money as a measuring
unit and preparing
financial statements
expressed in dollars,
that the dollar is a
stable unit of
measurement.
7. EXPLANATON
• Money is the unit of
measure employed in
recording financial
transactions.
• Knowing the money
values assigned to
financial transactions
enables the user of
financial statements to
estimate the profitability
of a business enterprise.
8. EXPLANATION
• A dollar of previous is not the same as dollar
of today because the effects of inflation.
• The value of dollar changes over time but
accountants cannot build useful
statements with unstable units of
measurement.
• Therefore a financial statement is prepared on
the basis of stable dollar concept.
9. EXAMPLE
Assume that in 1970, you purchased land for
$20,000. In 1990, you sell this land for $30,000.
Under generally accepted accounting
principles, which include the stable dollar
assumption, you have made a $10,000 gain on
the sale. Economists would have point
out, however, that $30,000 in 1990 represents
less buying power than did $20,000 in 1970.
When the relative buying power of the dollar in
1970 and 1990 is taken into consideration, you
come out behind on the purchase and the sale of
this land.
10. IMPORTANCE OF ACCOUNTING
ASSUMPTIONS
• Accounting have established
group of assumptions, those
assumptions are the basics of
financial accounting. At the
same time, assumptions are
not accounting principles, as
they are more of agreed upon
rules. Assumptions are
traditions and customs, which
have been developed over a
period of time and wellaccepted by the profession.
Basic accounting assumptions
provide a foundation for
recording the transactions and
preparing the financial
statements there from.
11. CHANGE IN THE VALUE OF DOLLAR
• If you had $100,000 at
the beginning of 2007, on
December 31st you were
able to buy$90,400 worth
of goods.
• 5-year change: If you had
$100,000 at the beginning
of 2003, by the end of
2007 you could only
buy $62,800 worth of
goods.
12. MONETARY UNIT & STABLE DOLLAR
ASSUMPTION
• The monetary unit assumption is that in the
long run, the dollar is stable—it does not lose
its purchasing power.
• One aspect of the monetary unit assumption
is that currencies lose their purchasing power
over time due to inflation, but in accounting
we assume that the currency units are stable
in value. This is alternatively called stable
dollar assumption.
13. EXAMPLE
• The company's property, plant and equipment on
2009 balance sheet amounted to $2 billion.
During 2010 inflation was 10%. The monetary
unit and stable dollar assumption prohibits any
adjustment to current or prior period figures to
account for the inflation.
• The BP oil spill in Gulf of Mexico was a natural
disaster but accounting only reports the financial
impact in the form of claims paid, damages paid,
cleanup costs, etc. This is due to the limitation
imposed by the monetary unit assumption.
14. DRAWBACKS
The currency unit
assumption works on the
basis that the currency
unit will hold its value for
the foreseeable value.
This means accounts
prepared on this
assumption will not take
account of possible future
inflation or variations in
the domestic value of
income received in
foreign currencies.
