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 with regard to accounting assumptions:
- Going concern
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 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.
The aim of the accounting is to keep systematic records to ascertain financial performance and financial position of an entity and to communicate the relevant financial information to the interesting user groups. The financial statements are basic means through which the management of an entity makes public communication of the financial information along with selected quantitative details. It is also called as the formal records of the 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. Main parts of the financial statements are Balance Sheet, Profit and Loss A/c and Cash Flow Statement
Qualitative Attributes of Financial Statements
There must be few qualitative attributes in financial statements which make it useful to the users of the financial information; some of them are as follows:
- Understandability – An essential quality of the information is that is 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.
- Relevance – information must be reasonable to the users of the financial statements for the purpose of decision-making needs. Information about the financial position and past performance are frequently used as the basis for decision making.
- Reliability – to be useful, information should be reliable. Information is supposed to be reliable when it is free from material errors and biases.
- Comparability – users must be able to compare the financial statement of an enterprise through time in order 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.
- 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 the subjective term and varies from business to business.
- Faithful representation –Information must represent faithfully the transactions and other events 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 in assets, liabilities and equity of the business enterprise on the reporting date.
- Substance over form – if the information is to represent faithfully the transactions and other events that it purport to represent it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely their legal form.
- 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 user in order to achieve the predetermined result.
- Prudence – It follows conservatism principle. According to this, accountants should not account for probable profit but must provide for probable losses.
- 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 take appropriate decisions. The principle of full disclosure implies that no matter should be omitted.