During the preparation of the proper and final accounts for any business or any company, there are certain theoretical assumptions of accounting made that people tend to follow pretty commonly These are known as the fundamental accounting assumptions. If there aren’t any specified assumptions other than these, then it will be assumed that these principles would be implemented in the whole process of preparing the final accounts for the company. So, here the students are going to learn about these 3 fundamental accounting assumptions which are known as Going Concern, Consistency, and Accrual.
What Are the Fundamental Accounting Assumptions
When it comes to the three fundamental accounting assumptions, these are just some principles or concepts which are commonly assumed to be followed during the accounting transactions. These assumptions are made according to the Accounting Standards of India. Students can rely on our notes to get some information on the chapter and the topic. Here we are going to discuss some of the important assumptions of accounting that are used by the companies.
1. Going Concern
Now, this is a particular assumption that is made based on a principle that states while making certain financial statements for any particular entity, people can assume that the particular company doesn’t have any particular plans for winding up and that too in the near future. So, there is an assumption made here that no matter what happens, the company will continue to exist for a long period, quite possibly indefinitely. So, the assumption of the company going strong is one of the fundamental assumptions. Now, this assumption is particularly very important because this can allow some proper and appropriate methods of accounting for the depreciation and the fixed assets as well.
Since there is the historical method of cost valuation involved, we can safely assume that the company will not go off business for an indefinite period. In such cases, there is a need to value the assets at the market value. However, in the case of going concerned, the increase or the decrease of these assets will not be taken into consideration for sure. That is one of the most important things that the students need to keep in mind when they are discussing the 1st fundamental accounting assumption.
2. Consistency
Now, this is one particular assumption that states that unless certain things are mentioned in the accounting procedures, policies, and standards, the things which are being followed properly in the accounting field would remain the same. Hence, it means that there will be some uniformity when it comes to the financial statements for the company over time. Also, the process of comparing financial statements becomes a lot easier two. This might prove to be essential for external stakeholders and potential investors who are interested in the company.
By having the same accounting principles and treatment, management will easily be able to draw certain conclusions regarding the company’s performance in the best way. Hence, when it comes to the entire aspect of decision-making and planning for the betterment of the company, this particular assumption is to be helpful. With the help of our notes, students can get more information on the second fundamental accounting assumption.
3. Accrual
This is the third fundamental accounting assumption that is made by any company or business. The students will be able to gain some insight into the topic with the help of our notes and hence can score good marks in the examinations. According to this particular assumption, the different transactions of accounting are constantly being recorded in the accounting books right when they occur. Now, this is known as the mercantile system. It is just the opposite of the cash system. According to the concept of accrual, the company’s expenditure or revenue is always recognized during the year they are realized. The accrual concept also says that the revenue can be completely recognized in the year it actually has been realized. Similarly, when we are talking about expenses, it doesn’t depend on the payment of actual cash.
We certainly hope that our notes for the fundamental accounting assumptions can help you out in the examinations. By knowing all about the fundamental assumptions, students can do their revision and ultimately use these notes to score good marks and stay on top of the class. All these notes are carefully created after thorough research of the topics and hence can be relied upon.
FAQs on Fundamental Accounting Assumptions: Key Concepts
1. What are the three fundamental accounting assumptions according to Accounting Standard (AS) 1?
The three fundamental accounting assumptions that form the basis for preparing financial statements are Going Concern, Consistency, and Accrual. These assumptions are presumed to be followed in every business unless stated otherwise. These concepts are a core part of the Theory Base of Accounting and are crucial for ensuring that financial data is reliable and comparable.
2. How does the Going Concern assumption affect the valuation of a company's assets?
The Going Concern assumption presumes that a business will continue its operations for the foreseeable future. This directly impacts asset valuation by allowing them to be recorded at their historical cost less depreciation, rather than their immediate liquidation or sale value. This provides a stable basis for financial reporting, assuming the company isn't on the verge of shutting down. You can learn more about the Importance of the Going Concern Concept with Examples for a deeper understanding.
3. What is the purpose of the Consistency assumption in accounting?
The Consistency assumption states that once a business decides on an accounting method, it should stick with it from one period to the next. The main purpose is to ensure comparability of financial statements over time. For example, if a company uses the Straight-Line Method for depreciation in one year, it should use the same method in subsequent years. This allows stakeholders to make meaningful comparisons of performance and identify trends without data being skewed by changing calculation methods.
4. Can you explain the Accrual assumption with a simple business example?
The Accrual assumption requires transactions to be recorded when they occur, not necessarily when cash is exchanged. For example, if a consulting firm provides services to a client in March worth ₹50,000 but receives the payment in April, the revenue of ₹50,000 is recorded in the financial statements for March. This is because the revenue was 'earned' in March. This ties directly to the Matching Concept, which aims to match expenses with the revenues they helped generate in the same period.
5. Are accounting 'assumptions' the same as accounting 'principles' or 'concepts'?
No, they are related but distinct parts of the accounting framework. Here's a simple breakdown:
- Assumptions: These are the foundational premises that are taken for granted, like Going Concern, Consistency, and Accrual.
- Concepts: These are the broader ideas that guide the accounting process, such as the Business Entity Concept or Money Measurement Concept.
- Principles: These are the specific rules and guidelines derived from the assumptions and concepts, like the Revenue Recognition Principle or the Matching Principle.
6. What happens if a company does not follow one of the fundamental accounting assumptions?
If a company does not follow a fundamental accounting assumption, it must explicitly disclose this fact in its financial statements along with the reasons. For instance, if the Going Concern assumption is not valid because the company is facing bankruptcy, the financial statements must be prepared on a 'liquidation basis'. This would mean valuing assets at their net realisable value, which is often much lower than their historical cost. Failure to disclose such a deviation would make the financial statements misleading.
7. Why are these assumptions considered 'fundamental' in the CBSE Class 11 Accountancy syllabus?
These assumptions are considered fundamental in the CBSE Class 11 Accountancy syllabus because they form the bedrock of the entire accounting process. Every subsequent topic, from recording journal entries to preparing the final balance sheet, relies on these assumptions being true. They ensure that financial information is prepared in a consistent, comparable, and logical manner, providing a reliable foundation for understanding business performance and financial position.
8. Are there any limitations to the fundamental accounting assumptions?
Yes, while fundamental, these assumptions have certain limitations:
- Going Concern: It may not be a realistic assumption for businesses facing severe financial difficulties or in volatile industries.
- Consistency: Sticking to a method out of consistency might prevent a company from switching to a newer, more accurate accounting method.
- Accrual: This can be more complex than cash-based accounting and may not accurately reflect a company's immediate cash flow situation, potentially hiding liquidity problems.
