1. Core Going Concern and Accrual Assumptions
- Going Concern Assumption: The business is assumed to operate indefinitely into the foreseeable future. It has neither the intention nor the need to liquidate.
- Impact: This justifies carrying long-term assets at historical cost rather than liquidation value. If a company is a non-going concern, all assets must be written down to their net realizable value immediately.
- Accrual Basis of Accounting: Transactions are recorded when they occur, not when cash changes hands.
- Impact: Revenue is recorded when earned (performance obligation met), and expenses are recorded when incurred (resources consumed). This provides a more accurate view of profitability than cash tracking.
2. Measurement and Reporting Principles
- Monetary Unit Assumption: Only transaction data capable of being expressed in terms of money should be included in accounting records. It assumes the currency unit remains stable (ignoring hyperinflation unless specific standards apply).
- Economic Entity Assumption: The activities of a business entity must be kept separate from the personal financial activities of its owners and any other business.
- Historical Cost Principle: Assets are initially recorded at their original acquisition cost. This provides reliable, objective, and verifiable figures, though it may fail to reflect current market value over time.
- Revenue Recognition Principle: Revenue is recognized when control of goods or services transfers to the customer, in an amount that reflects what the company expects to receive.
- Matching Principle (Expense Recognition): Expenses must be tied to the revenues they helped generate. If a machine helps make products sold over 5 years, its cost must be spread over those 5 years as depreciation.