Accounting Assumptions

Accounting Assumptions, Principles, and Constraints

The basic assumptions of accounting are measurables.   The measurements and financial statements show the metrics and measurable activities.   The major assumptions are monetary units, economic entity, time periods, and growing concerns.   Most businesses are shown by their measurable time periods such as quarters or years. The basic principles of accounting are the historical costs that a business has.   Companies would like to easily and clear be able to distinguish their activities.   For example Nordstrom will want to see how they are compared to Saks.   The major assumptions of principles are revenue recognition, full disclosure and cost, and matching.   For example the cost it takes to make a product and the revenue that is generated must go together in the same year.   The constraints of accounting are the consistent application of fiscal methods from quarter to quarter and year to year.     The major constraints are materiality and conservatism.   Materiality is the determination of the small things don’t have to be followed.   A $1000 purchase for Nordstrom isn’t like a $1000 purchase by a small mom and pop business.   The conservatism is overstating of assets and income.     The U.S. GAAP is a way to keep general rules and guidelines.   The GAAP is a way to keep accounting objective.   They helped to establish what should be included in financial statements and operating guidelines.   The GAAP is where the rules and regulations come from for businesses to adhere too.   This will make the way financial accounting and reporting is done generally accepted.