Accounting assumptions define how a business is controlled and managed. It is a way of keeping the business transaction documented. The main aim of accounting assumption is to maintain a standard accounting definition and create a guideline for comparisons. With the help of accounting services, investors, analysts, and management can make the correct assumptions when comparing one company’s statistics with another.
Accounting assumptions act as a guideline that ensures that your business is running smoothly as per FASB( Financial Accounting Standards Board). The accounting assumption forms a groundwork for GAAP(General Accepted Accounting Principles) and establishes a solid base for authentic information. All the accounting principles originated from accounting practices and FASB.
Importance Of Accounting Assumptions
No company cannot craft their financial statements in line with its own rule. Making financial statements without any basic fundamental foundation will become meaningless and invalid. You cannot verify whether the data is correct and cannot determine the quality of management work.
This is why accountants in Dubai have formulated accounting assumptions when making financial statements. The managers, investors and analysts can get consistent and reliable information to evaluate the financial performance and ideas.
It helps the financial readers to know whether the financial statements are valid or not. The accountant company in Dubai allows the financial readers to get insights into the economic condition of the organisation. These are a set of rules which determines the credibility of the company. The accounting assumptions help govern the organisation’s activities, and it forms an essential structure for evaluating the authenticity and reliability of the information.
The company’s management can make critical decisions based on the genuineness and reliability of the company’s financial statements. It enables the user of financial statements to minimise and exclude any traits of alarming problems, frauds and errors in the company.
It provides a basic structure that tells how the financial statements are recorded and reported at the end of the financial year. The accounting company in UAE allows the company’s analysts, investors, and management to check the financial records’ authenticity, reliability, and accuracy for a particular accounting period.
The accounting assumption helps the investors to take a critical decision on the investment. Investors can hire an accountant for determining the authenticity of the financial statements. They show the actual report of the company’s financial condition and prevent them from being manipulated through its misleading transaction and financial records.
Types of Accounting Assumptions
The basic accounting principles have been constructed from long term accounting practices which are assembled below:
Economic Entity Assumptions
This type of accounting principle creates a difference in financial records between the company and a company owner. It says that the company’s financial transaction should not mess up with the personal transaction of the company’s owner. Therefore, it is advisable to evaluate commercial and personal financial records separately.
Specific Time Assumptions
The specific time period assumption reveals that financial reports vary for each financial period. Moreover, it says that all the financial statements must be prepared for a particular period of time, which they need to evaluate later. With the help of this assumption, the data, loss, and profit in the balance sheet are reported at a particular time.
Monetary Unit Assumption
The rule states that all the financial affairs worth recording should be measured in the same currency. Under this accounting principle, the inflation rate of the country is not included in the financial report. It generally means that the purchasing capacity of the currency remains the same over time.
Revenue Recognition Principle
It is a type of accounting principle which guides a company to record their earned revenue in an accrual basis accounting system. The main objective of this rule is to record the earned income, mainly when goods or services are sold, even when the payment is still needed to be realised.
Full Disclosure Principle
It tells that any company data that may influence the decision of financial report readers, and thus it should be mentioned in the financial reports. This allows an investor to know about any hiding material and comes to know about the insights of accounting practices. Under this assumption, all the financial statements must be revealed to the company’s analyst to ensure complete transparency.
According to this principle, if an accountant finds any fault while filling the tax reports, the accountant has the chance to judge whether the amount is immaterial to the business. Depending on the business size, an amount can be intangible, and the accountant takes the final decision.
This rule reduces the amount of effort and time to report the financial transactions, mainly when the benefit is less than the cost. It is suggested to avoid recording an insignificant event that would cost the company a large company.
Under this assumption, all the expenditures, including the wages and sales commissions, must be recorded and compared with the revenues of the respective period. This principle involves recording both the profit and expenses based on an accrual basis of accounting. It provides a deeper understanding of your business activity and revenue than any other form of a statement.
Going Concern Assumption
According to this assumption, the business operation will continue to exist for an indefinite future, which ensures that the company will not liquidate its assets in any situation. It ensures that the company will become insolvent and continue to conduct its business operation for a long time. And this is the reason why expenses are calculated in the later accounting period.
These are some of the set of principles that a reputed organisation follows. With the help of accounting assumptions, financial transactions are documented. Every company should adhere to the rules of accounting assumptions for running the business efficiently. It defines the level of reliability and genuineness of the financial report of an organisation. The accounting principle is helpful for every company and its employees and is also beneficial for the readers of financial information.
If you cannot keep track of your accounting data, you can consider calling Accountant Dubai. It is an accounting consultancy in Dubai. They will help you manage your company assets efficiently and help update payments, sales, purchases, profit, and loss of the organisation.