![]() Industry practices convention - accepted industry practices should be followed even if they differ from GAAP. Users of the information should not be overburdened with information overload.Ĭost-benefit convention - a modifying convention that relaxes GAAP requirements if the expected cost of reporting something exceeds the benefits of reporting it.Ĭonservatism convention - when there is a choice of equally acceptable accounting methods, the firm should use the one that is least likely to overstate income or assets. Materiality convention - a modifying convention that relaxes certain GAAP requirements if the impact is not large enough to influence decisions. The following are some commonly observed modifying conventions: ![]() When everything that is necessary to earn the revenue has been completed.įull disclosure principle - all of the information about the business entity that is needed by users is disclosed in understandable form.ĭue to practical constraints and industry practice, GAAP principles are not always applied strictly but are modified as necessary. Revenue recognition principle - revenue is realized (reported on the books as earned) Matching principle - matching of revenues and expenses in the period earned and incurred. Sometimes costs are written down, for example, for some short-term investments and marketable securities, but costs never are written up. Accountants are very conservative in this sense. One never writes up the cost of an asset. Historical cost principle - assets are reported and presented at their original cost and no adjustment is made for changes in market value. The basic assumptions of accounting result in the following accounting principles: dollarįixed time period assumption - info prepared and reported periodically (quarterly, annually, etc.) US GAAP includes basic underlying accounting principles, assumptions, and detailed accounting standards of the Financial Accounting Standards Board. Going concern assumption - the business is going to be operating for the foreseeable future. Generally accepted accounting principles (GAAP). So that the finances of the firm are not co-mingled with the finances of the owners. Periodicity Assumption divide economic activities into time periods for reporting. Constraints such as materiality and conservatism. Accounting Underlying Assumptions Basis for Generally Accepted Accounting Principles (GAAP) Entity Assumption each business is its own accounting entity. ![]() Separate entity assumption - the business is an entity that is separate and distinct from its owners, The basic underlying accounting principles, assumptions, and concepts include the following: Cost principle. The following are basic financial accounting assumptions: Underlying Assumptions, Principles, and Conventionsįinancial accounting relies on several underlying concepts that have a significant impact on the practice of accounting. ![]()
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