Accounting assumptions & Qualitative Characteristics

Assumptions are:

• concepts, rules or regulations that are established standards which all other decision making in accountinng is based.

• rules we choose to abide by

• concepts that we assume to be true, in relation to how to prepare accounting reports

How many assumptions are there in accounting? (that we need to know and understand)

• 2

• 3

• 4

• 5

The assumption which underlies the accrual system of accounting is:

• Accounting entity assumption - each business is it's own entity

• The matching principle (as part of the accountign period assumpion) which assumes that all income will be matched to the relevant expenses for a particular period.

• The monetary assumption - all transactions are in dollars

Valuation of assets should be objective in accounting. Which assumption states this:

• the historical cost assumption

• the going concern assumption

I am a multinational corporation which means I conduct transactions in both Australia, the UK and the USA. My accountant has advised me to report transactions in the local currency. What would you say to this business owner and why?

• You should report transactions in a single currency. This means converting to the chosen currency at a given exchange rate and using these figures. This is the basis of the Monetary assumption.

• You should choose a currency which allows local users of accounting reports to understand the business. Accountants can use their judgement (be subjective) when reporting in businesses like this.

• There is no guidelines for this scenario. Your accountant is probably right.

The accounting entity assumption (that owners and business assets, liabilities & equity are separate) leads to which important concept?

• Debits on the left, credits on the right

• A-L = OE the Accounting equation

What are qualitative characteristics?

• Something an Accountant can choose to comply with or not

• Quality of the reports and how they are presented

• Characteristics that financial information should possess if it is to be included in financial reports.

The qualitative characteristics are:

• relevance, reliability,materiality, caution, understandability

• relevance, reliability,materiality, comparability, understandability

• relevance, reliability,money source, comparability, understandability

• accuracy, reliability,materiality, comparability, understandability