Lesson 3: Accounting Assumptions

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Going Concern Assumption

•  Unless proved contrary, accountants assume that the business entity will have an infinite life.

•  External users of financial statements can assume that an entity is a going concern; unless the contrary is stated.

•  This means that the business does not, in the foreseeable future, intend to close down or liquidate (by selling off its assets) or declare bankruptcy.

© KayOne Education, 2015

Going Concern Assumption

Why is this important ?Buildings

Furniture

Kitchen Equipment

Is a Going Concern

$ 10,000

$ 2,000

$ 8,000

Is NOT a Going Concern

$ 7,000

$ 1,000

$ 3,000

$ 20,000 $ 11,000

Unless otherwise stated, the entity is assumed to be a going concern

© KayOne Education, 2015

Consistency Assumption

•  This assumption states that a business must choose a single method of accounting and reporting, and use it consistently over a period of time.

•  You cannot go back and forth with regard to the accounting treatment.

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Consistency Assumption Selling Price of each T-Shirt is $ 10

Purchase price - $ 4

Purchase price - $ 6

Purchase price - $ 8

Revenue $ 10

Less: Cost of Goods Sold $ 4

Profit $ 6

Specific Identification Method

Purchase price - $ 4Purchase price - $ 6Purchase price - $ 8

Total Purchase Cost for 3 shirts - $ 18

Average cost per shirt = 18 ÷ 3 = $ 6

$ 6

$ 4

Weighted Average Cost Method

© KayOne Education, 2015

Accrual Assumption

•  States that revenues, costs and expenses are accounted for, as and when they are incurred and not when they are received and/or paid.

•  Revenues – Recorded when goods are shipped or the sales are made (not when the cash is received)

•  Expenses and Costs – Recorded when they are incurred, and not when the actual payment is made.

© KayOne Education, 2015

Accrual Assumption

Supply pizzas every Wednesday

Pay on the 15th of the subsequent month

Sale

Cash

Income is accounted on the date of sale

NOT on the date of receipt of cash

Summary

Accounting Assumptions

•  Going Concern – A business is assumed to remain in existence (and not close down) in the near future unless the contrary is proven true.

•  Consistency – Accountants are assumed to have followed consistent accounting practices unless otherwise stated.

•  Accrual – Revenues and costs are accounted as and when the transactions take place and not when cash is actually received or paid.

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