Accounting_Assumptions

Accounting Assumptions, Principles, and Constraints Danielle Navarro XACC 280 October 7, 2011 Richard Fielden The FASB or the financial accounting standards board has developed regulations also known as the GAAP or generally accepted accounting principles. The guidelines were established to make financial statements useful to user, particularly external users. All financial statements should contain similar characteristics to make decision making easier. The characteristics are relevance, reliability, comparability and consistency (Weygandt, Kimmel, & Kieso, Chapter 7, Accounting Principles, 2008). These characteristics are guided by accounting assumptions, principles and constraints. The assumptions are building blocks to the accounting process. For example the monetary unit assumption specifies that only transactions or economical events that can be expressed in a monetary value be documented. This creates relevance. The time period assumption indicates that the transaction information be split into time frames, such as a month or quarter. This creates consistency and reliability(Weygandt, Kimmel, & Kieso, Chapter 7, Accounting Principles, 2008). These are just two examples of accounting assumptions; there is also the economic entity assumption and the going concern assumption. Each assumption helps build financial statements, and help them meet the designated characteristics. The principles create guidelines for reporting and recording accounting data. The revenue recognition principle indicates that revenue be recognized in the period that it is earned. The matching principle asks that a business pair up expenses with revenues in the period that the earnings are made. The full disclosure principle requires that a business share financial activity that would make a difference to the users of the financial statement. Lastly the Cost principle ask that a business record assets at their cost (Weygandt, Kimmel, & Kieso, Chapter 7, Accounting Principles, 2008). Each principle requires organization to make the information consistent, reliable, consistent and relevant. The accounting constraints allow for changes to procedure according to the GAAP. For example immaterial information or information that would not make an impression on decision makers can be recorded without specific guidelines. The next constraint allows for a business to choose a process that will be least likely to overstate assets and income, this is known as conservatism. References Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2008). Financial accounting (6th ed.). Hoboken, NJ: Wiley