Underlying assumptions which underpin financial accounting

Question

Illustrate out the two underlying assumptions which underpin financial accounting.

Answer 1

The two underlying assumptions are going concern concept and accruals concept which are illustrated below:

• The going concern concept is only based upon the principle which the entity is a going concern and will carry on in operation for foreseeable prospect. Therefore, unless it is recognized otherwise, it is assumed that entity is not intending to close down or considerably decrease its activities (IASB, 2010). When that presumption is not suitable, the financial statements will necessitate showing the assets of business at their break-up value and any liabilities which are applicable on liquidation.

• The accruals concept is principle which costs and revenue are recognized as they are earned and acquired not as cash is paid or received (realization concept), and they are harmonized with one another (matching concept) and dealt with in income statement of period to that they relate (period concept).