What are Basic Accounting Assumptions
Business books or financial statements that are valid and accurate are the result of the hard work of accountants who have fulfilled and carried out basic accounting assumptions properly and correctly and are structured.
Basically, financial reports are not only useful for potential investors in evaluating the performance and condition of the company objectively, but also for the company itself, namely as material for evaluation and projections of future business development, as well as supporting data in every company policymaking.
The basic assumptions of accounting are about how business bookkeeping is organized and operates. This is the basic structure of how business transactions are recorded. If any of these assumptions are incorrect, you may need to amend the financial statements that the business produces and reports in its financial statements.
To obtain valid and accurate financial statements, the preparation of business books must be based on basic accounting assumptions, which involve the following ten assumptions:
1. Economic Entity
This concept states that the company is an independent entity or an independent business unit, separate from the owners or shareholders. That way all company transactions are separate from the owner.
2. Business Continuity
This assumption states that the company will last forever. This means that liquidation is not expected to occur in the future. This business continuity principle affects other accounting procedures, such as asset valuation based on future cash flows and depreciation.
3. Monetary Unit
This means that all business transactions must use certain units of money according to the location of the company’s establishment. The recording is only done on everything that can be measured and valued with a certain unit of money. Quality and achievements that include non-qualitative transactions cannot be reported.
4. Accounting Period
This basic accounting assumption shows that the company’s financial assessment and reporting is carried out at a certain time period that has been determined.
5. Historical Cost
This principle requires you to record all costs incurred to obtain each good or service.
6. Accrual Accounting
The bottom line is that revenues and expenses are reported at the time of occurrence. For example, the company already considers it as income if there is a purchase of goods or services from consumers who pay in installments. Even if the company buys goods on credit, the expenditure is considered an expense.
7. Revenue Recognition
Another basic accounting assumption is revenue recognition. This principle states that revenue should be recognized in the period in which the revenue is incurred. Revenue can be recognized when there is certainty in the amount or nominal that can be measured precisely with the assets obtained from the sale of goods or services.
8. Meet
The assumption of convergence in accounting means that costs combined with income are used to determine the amount of net income for each period. Charges on expenses cannot be made if revenue recognition is deferred.
9. Consistency
Consistency emphasizes that financial statements should use the same methods and procedures in recording. If your company implements the accrual system, then that is what is used in preparing financial statements. Changing the system is not recommended because it can confuse users of accounting information to make important decisions.
10. Full Disclosure
Based on this principle, accounting products such as financial statements must include all adequate and complete information, without anything being hidden. In this way, users of financial reports can make strategic decisions.
Providing information in the form of business books or financial reports that are accurate and accountable to all interested parties is one of the objectives of accounting.
Conclusion
Use ten basic accounting assumptions as a reference for making accounting products such as business books or financial reports that are accurate, reliable, and accountable.