ASSUMPTIONS & ACCRUAL BASIS OF ACCOUNTING

• Accounting Assumptions are the foundation of GAAP. It serves as the bedrock and basis of all the other accounting principles. It ensures uniformity in the practices of accounting.
• In Going Concern Assumption, the business is assumed to have indefinite life and the assets are not liquidated.
• In Accounting Entity Assumption, the business is treated like a juridical or artificial person. Only the business transactions are recorded in the book of accounts and not the personal transctions of the owner.
• In Time Period Assumption, the total life of the business is divided into several periods to foresee the business performance in a particular period. The periods are: monthly, quarterly, semi-annually, and annually.
• Financial Statements prepared in less than 1 year is called an Interim Financial Statement (monthly, quarterly, semi-annually).
• In Time Period Assumption, Calendar Year is from January 1 to December 31, while Fiscal Year is from any month except January up until exactly 12 months.
• In Monetary Unit Assumption, its 2 aspects are quantifiability and stability.

  • Quantifiability - every assets or transactions must be in Philippine Peso currency (note the conversion if it is in dollar). Record the measurable transactions like assets, liability, capital, income, and expenses.
  • Stability - the equivalent purchasing power of the money is not considered, only its face value.
• There are 2 ways of recording the financial performance of an entity:

  1. Cash Basis - the date of payment is important. Only cash transactions are recorded in the Statement of Cash Flows.
  2. Accrual Basis - transaction is recorded whenever they happened regardless if it is paid or not.