Financial Accounting

What are the Fundamental Accounting Assumptions?

Fundamental Accounting Assumptions

Fundamentals accounting assumptions are the underlying assumptions that are presumed to have been followed while preparing the financial statements. There are three fundamental regards to accounting assumptions:

  1. Going concerned
  2. Consistency
  3. Accrual

If there is nothing mentioned about the fundamental accounting assumptions in the financial statements, then it shall be presumed that these assumptions have been followed in the preparation of the financial statement. However, if there is a departure from any of the above accounting assumptions, a separate note should be given in the audit report of the company or the business enterprise.

fundamental accounting assumptions

Financial Statements

The aim of accounting is to keep systematic records to ascertain an entity’s financial performance and financial position and to communicate the relevant financial information to the interesting user groups.

The financial statements are a basic means through which an entity’s management makes public communication of the financial information along with selected quantitative details. It is also called the formal records of financial activities. To have a record of all the transactions and also to determine whether all these transactions resulted in profit or loss for the period, all business entities prepare financial statements. The main parts of the financial statements are the Balance Sheet, Profit and Loss A/c and Cash Flow Statement.

Qualitative Attributes of Financial Statements

There must be a few qualitative attributes in financial statements which make them useful to the users of the financial information; some of them are as follows:

  1. Understandability – An essential quality of the information is that it must be readily understandable by users. It is assumed that users possess a reasonable knowledge of the business and economic activities and accounting and study the information with reasonable diligence.
  2. Relevance – information must be reasonable to the users of the financial statements for decision-making needs. Information about the financial position and past performance are frequently used as the basis for decision making.
  3. Reliability – to be useful, information should be reliable. Information is supposed to be reliable and free from material errors and biases.
  4. Comparability – users must be able to compare the financial statement of an enterprise through time to identify trends in its financial position, performance and cash flows. Users must also be able to compare the financial statement of different enterprises in order to evaluate their relative financial position.
  5. Materiality – The relevance of the financial statement is affected by its materiality. Information is material if its misstatement can influence the decision of the user. Materiality is a subjective term and varies from business to business.
  1. Faithful representation –Information must represent the transactions and other events faithfully if either purport to be represented or could reasonably be expected to represent. Only then it will be called financial statement is faithfully represented. Thus, a balance sheet should represent faithfully the transactions and other events that consequence the business enterprise’s assets, liabilities and equity on the reporting date.
  2. Substance over form – if the information is to represent the transactions faithfully and other events it purports to represent, they must be accounted for and presented following their substance and economic reality and not merely their legal form.
  3. Neutrality –the information contained in the financial statement should be free from error and bias. Financial statements are not neutral if, by the presentation of information, they affect the decision of the user to achieve the predetermined result.
  4. Prudence – It follows the conservatism principle. Accordingly, accountants should not account for potential profit but must provide for probable losses.
  5. Full, fair and adequate disclosure- The financial statement must disclose all reliable and relevant information about the business enterprise to the management and also to the external users, which would help them to make appropriate decisions. The principle of full disclosure implies that no matter should be omitted.

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