So instead of charging the expense in one year, we amortize it. The benefit of such an expense is enjoyed over a number of years. But in the case of a going concern, we do not take into account the increase/decrease in prices of assets.Īnother case would be that of expenses written off over a number of years like Deferred Advertising Expense. If this is the case then such assets will have to be valued at market value. Since traditionally we follow the historical cost method for valuation of assets, we have to assume that the business is in no danger of being shut down in the future.
This assumption is important as it allows for the appropriate accounting of fixed assets and depreciation. So the assumption is that the company will continue to exist indefinitely (far into the future), i.e. This assumption is based on the principle that while making the financial statements of an entity we will assume that the company has no plans of winding up in the near future. Now let us take a look at the three accounting assumptions as per the Accounting Standards of India. This way the users know about such facts. If these fundamental assumptions have not been followed then the entity should specifically disclose this information, along with their financial statements. It is absolutely acceptable if the entity does not follow such assumptions while recording their financial transactions. However, this does not mean that such fundamental accounting principles have to be compulsorily followed by all organizations. So there is a need for a specific notation saying such concepts have been adhered to, it is understood. Let us get started! Fundamental Accounting AssumptionsĪccounting assumptions are the three very basic accounting concepts or principles that are assumed to have been followed in the accounting transactions of an entity. The three main assumptions we will deal with are – going concern, consistency, and accrual basis. So unless specified otherwise, it will be assumed that such principles were implemented in the final accounts of the company. When preparing the financial accounts of a company there are some theoretical accounting assumptions which are commonly followed.
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