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Accountants make four assumptions in the preparation of financial statements
- The economic entity
The financial statements are prepared under the economic entity assumption, meaning that the business itself is separate from the owners of the business and any other businesses. - Accrual basis
The financial statements are prepared under the accrual basis, which is a method of financial reporting that measures all cash relating to the business as it comes in and as it goes out, called ‘cash accounting’. - Going concern
The financial statements are prepared under the going concern basis, which assumes that the business will continue its operations as normal into the foreseeable future. - The period assumption
This assumption describes the time interval between financial statement reports.
According to the Framework of IAS/IFRS, the underlying assumptions for the preparation of financial statements are:
Accrual basis The financial statements are prepared under the accrual basis. According to accrual basis of accounting, the effects of transactions and other events are recognized when they occur and not when the cash is received or paid. In other words, the transactions are recorded in the books of accounts when they occur and not when the cash is received or paid. It is opposite to cash basis of accounting.
Going concern basis The financial statements are prepared under the going concern basis. Under going concern basis, it is assumed that the enterprise will continue in operation for the foreseeable future, and the enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its operations.
See also[edit | edit source]
- Objectives of Financial Statements
- Qualitative characteristics of financial statements
Further reading[edit | edit source]
- IASB. International Financial Reporting Standard
External links[edit | edit source]
- Official website of International Accounting Standard Board
- Interpretations of IAS and IFRS
Which underlying assumption serves as the basis for preparing financial statements at regular arbitrary or artificial points in time? A. Accounting entity
B. Going concern
C.
Accounting period
D. Stable monetary unit
1.What is the only underlying assumption mentioned in the Conceptual Framework forFinancial Reporting?a.Going Concernb.Accounting entityc.Time Periodd.Monetary unit
2.Which basic assumption may not be followed when an entity in bankruptcy reportsfinancial reports?
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3.The financial statements that are prepared for the business are separate and distinctfrom the financial statements of the owners
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4.The economic entity assumption
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5.Which underlying assumption serves as the basis for preparing financial statements atregular artificial point in time?a.Accounting entityb.Going concernc.Accounting periodd.Stable monetary unit
6.Which basic accounting assumption is threatened by the existence of severe inflation inan economy?
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7.The overriding qualitative characteristics of accounting information is
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