Accounting Policies & Fundamental Accounting Assumptions
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An interesting topic from Fundamental Accounting and Auditing – ‘Accounting Policies’ is discussed below:
Accounting Policies
They ensure that the transactions have been recorded properly by the enterprise while preparing financial statements.
An accounting policy once selected is applied consistently. However, an entity can change the accounting policy if certain conditions are satisfied.
There is no single list of accounting policies that can be applied to all the circumstances. The entity can choose its own accounting policy. The choice of the appropriate accounting principles needs proper analysis and judgment by the management of the enterprise.
There are certain accounting assumptions that are followed while preparing financial statements. A disclosure is required when they are not followed.
Fundamental Accounting Assumptions
The three basic assumptions which are followed while preparing financial statements are as follows:
- Going Concern : Going concern is a basic underlying assumption in accounting. The assumption is that a company or other entity will be able to continue operating for a period of time that is sufficient to carry out its commitments, obligations, objectives, and so on.
- Consistency : It is assumed that accounting policies are consistent from one period to another, i.e. once you adopt an accounting principle or method, continue to follow it consistently in future accounting.
- Accounting on anaccrual basis : All the expenses and incomes are recorded on anaccrual basis, i.e. recording revenues and expenses when they are incurred, regardless of when cash is exchanged.
Areas in Which Differing Accounting Policies can be followed are
The following are examples of the areas in which different accounting policies may be adopted by different enterprises.
- Methods of depreciation, depletion, and
- Treatment of expenditure during construction.
- Conversion or translation of foreign currency items.
- Valuation of inventories.
- Treatment of goodwill.
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