ACCOUNTING TUTORIALS
Part I Financial Statements and Basic Accounting Principles
Concepts and Assumptions Used When Evaluating Financial Statements
Certain assumptions apply when managers / analysts evaluated the financial statements of a company / organization, otherwise known as an accounting entity:
- The accounting entity is a going concern. This simply means that the accounting entity is not going to be liquidated. It will continue in operation during the upcoming fiscal year (and presumably well into the future).
- Revenues and expenses should be matched. If a company earns revenues from the products it sells, the accounting process should match the costs of making and selling the products to the revenues earned from them. Otherwise, it is impossible to determine whether or not the company’s operations are profitable.
- Transactions are recorded at their original cost, with no adjustments made to reflect changes in market value and/or inflation. For example, suppose that a company purchases some plant and equipment. The plant may go up in value by the end of the fiscal year, and the value of the equipment may decline. But all accounting entries related to the acquisition of the plant / equipment will reflect the actual cost in dollars. This is known as the cost principle.