Fundamental accounting assumptions

Fundamental accounting assumptions is the basic assumption followed by every entity. If nothing has been written about the fundamental accounting assumption in the financial statements then it is assumed that they have been followed in their preparation of financial statements.

Fundamental accounting assumption is basic accounting assumption that accountant use in their work.

However,if any of the accounting assumptions not followed then this fact should be specifically disclosed.

Accounting concept defines the assumptions on the basis of which financial statements of a business entity are prepared.

The financial statements or statements are prepared on the basis of certain assumptions which are neither disclosed nor required to be disclosed and that is why they are called fundamental assumption.

There are three fundamental accounting assumptions :

• Going concern
• Consistency
• Accrual

Lets elaborate these assumptions :

1. What is going concern fundamental assumption?

The financial statements are normally prepared on the assumption that an enterprise is a going concern and continue its operation for foreseeable future. Therefore it is assumed that entity has neither intention nor necessity to liquidate its business operations.

Further if entity has intension or factor indicating significant doubt on entities ability to continue its business operation for foreseeable future. Then financial statements may have to be prepared in different manner and facts should be disclosed in notes to accounts.

The valuation of assets of the business is dependent on this assumption.

2. What is consistency?

In order to achieve comparability of financial statements of an enterprise through time, the accounting policies should be followed consistently from one period to another period. The change in accouting policy is made only in exceptional circumstances.

Further, the concept of consistency is applied when alternate methods of accounting are equally acceptable.For instance an enterprise may adopt several method of accounting such as WDV or SLM etc.

Likewise there are many method of valuation of inventories.But following the principal of consistency it is advisable that the company should follow over the years the same method of depreciation or the same method of valuation of inventories which is chosen.

The concept of consistency does not imply non flexibility.

However an enterprise should change its accounting policy only in following circumtances:

• To comply with the provision of law
• To bring books of accounts in accordance with the issued accounting standard.
• When under change circumstances,it is felt that new method will reflect more true and fair picture in the financial statements.

3. What is accrual?

Under accrual concept ,the transactions are recognised as soon as they occur whether or not cash or cash equivalent is actually received or paid . In brief, accrual concept the effects of transactions and events are recognized on mercantile basis . It means when they occur , they are recorded in accounting records and reported in financial statements of period to which they relate.

Further the financial statements are prepared on accrual basis inform users not only past events but also future obligation to pay cash in future. And section 128 of the Companies Act makes it mandatory for companies to maintain accounts only on accrual basis.

To understand accrual assumption knowledge of revenue and expenses is required.

Revenue is a gross inflow of cash ,receivables and other considerations arising in course of ordinary business activities of an enterprise. For instance, sale of goods and services.

Expenses is a cost related to operation of a accounting period. Accrual basis is more logical to profit determination than cash basis of accounting.

The accrual method follows the matching principle which says that revenue and expenses are recorded in the same period.

Conclusion:

The fundamental accounting assumptions plays an important role in preparation and presentation of financial statements. These is usually assumed and if any of the accounting assumptions not followed then this fact should be specifically disclosed.

You can refer meaning of accounting https://taxandfinanceguide.com/accounting/