How to read a Balance Sheet - Fundamental Accounting Assumptions
Transcript of How to read a Balance Sheet - Fundamental Accounting Assumptions
Lesson 3: Accounting Assumptions
© KayOne Education, 2015
Going Concern Assumption
• Unless proved contrary, accountants assume that the business entity will have an infinite life.
• External users of financial statements can assume that an entity is a going concern; unless the contrary is stated.
• This means that the business does not, in the foreseeable future, intend to close down or liquidate (by selling off its assets) or declare bankruptcy.
© KayOne Education, 2015
Going Concern Assumption
Why is this important ?Buildings
Furniture
Kitchen Equipment
Is a Going Concern
$ 10,000
$ 2,000
$ 8,000
Is NOT a Going Concern
$ 7,000
$ 1,000
$ 3,000
$ 20,000 $ 11,000
Unless otherwise stated, the entity is assumed to be a going concern
© KayOne Education, 2015
Consistency Assumption
• This assumption states that a business must choose a single method of accounting and reporting, and use it consistently over a period of time.
• You cannot go back and forth with regard to the accounting treatment.
© KayOne Education, 2015
Consistency Assumption Selling Price of each T-Shirt is $ 10
Purchase price - $ 4
Purchase price - $ 6
Purchase price - $ 8
Revenue $ 10
Less: Cost of Goods Sold $ 4
Profit $ 6
Specific Identification Method
Purchase price - $ 4Purchase price - $ 6Purchase price - $ 8
Total Purchase Cost for 3 shirts - $ 18
Average cost per shirt = 18 ÷ 3 = $ 6
$ 6
$ 4
Weighted Average Cost Method
© KayOne Education, 2015
Accrual Assumption
• States that revenues, costs and expenses are accounted for, as and when they are incurred and not when they are received and/or paid.
• Revenues – Recorded when goods are shipped or the sales are made (not when the cash is received)
• Expenses and Costs – Recorded when they are incurred, and not when the actual payment is made.
© KayOne Education, 2015
Accrual Assumption
Supply pizzas every Wednesday
Pay on the 15th of the subsequent month
Sale
Cash
Income is accounted on the date of sale
NOT on the date of receipt of cash
Summary
Accounting Assumptions
• Going Concern – A business is assumed to remain in existence (and not close down) in the near future unless the contrary is proven true.
• Consistency – Accountants are assumed to have followed consistent accounting practices unless otherwise stated.
• Accrual – Revenues and costs are accounted as and when the transactions take place and not when cash is actually received or paid.
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