WHAT ARE THE UNDERLYING ASSUMPTIONS AND CONSTRAINTS IN THE PREPARATION OF THE FINANCIAL STATEMENT. ALSO EXPLAIN WHAT ARE THE DIFFERENCE BETWEEN ACCOUNTING POLICIES AND ACCOUNTING PRINCIPLES.

November 8th, 2009 Comments off
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When preparing and presenting the financial statements, there is a common understanding of the underlying assumptions and constraints.
Underlying assumptions are those principles, concepts or practice that entities  are assumed to apply when preparing the company’s financial statement which are as follows:

  • Accrual basis which requires transactions and events to be recognized when they occur. The revenue for the year is matched with the expenses incurred in earning that revenue
  • Going concern assuming that the entity will continue to be in operation for the foreseeable future. It has no intention to liquidate or reduce the size of its operations.

In the case of constraints which are trade-off between relevance and reliability which are affected by factors like timeliness, cost benefits, balance between qualitative characteristics and true and fair view.

Accounting Principles definition:-

  • Are conventions that have evolved over time
  • Conventions which include Entity concept, going concern, materiality, prudence, accruals and consistency concept

Accounting Policies definition:-

  • Which are methods, procedures or bases chosen by the company to record and present events and transactions
  • Management need to choose the most acceptable accounting policies to represent or account for the various transactions and to present information in the company’s financial statement. One typical example is on inventory which can be valued based on various alternatives like FIFO, LIFO, Weighted average basis
  • The Accounting policies of a company is shown under the section of Notes to the financial statement.

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Financial Accounting

 
 

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