ASSUMPTIONS Going Concern Assumption: Company will continue operating for the foreseeable future long enough to carry

ry out its existing objectives. With: gives credibility to cost principle Without: capital assets stated at liquidation value (selling price = disposal cost), amortization unnecessary, current/long term classification wont matter. Inapplicable when liquidation appears likely. Monetary Unit Assumption: Only transaction data that can be expressed in terms of money should be included in the accounting records. E.g. presidents value Assumption that unit of measure remains stable (assumes minimal inflationary/deflationary effects) Economic Entity Assumption: Activities of the entity must be kept separate and distinct from the activities of the owner + other economic entities Time Period Assumption: Economic life of a business can be divided into artificial time periods. Less than one year: interim periods. One year: fiscal years, Jan-Dec: calendar years. PRINCIPLES Revenue Recognition Principle Revenue should be recognized in the accounting period in which it is earned Earned, when: 1. Production and/or sales effect is substantially complete 2. Revenues can be objectively measured 3. Collection is reasonably assured (an estimate can be made of anticipated uncollectibles) 4. Material expenses can be determined and matched Points of revenue recognition: 1. At point of sale 2. During production 3. At completion of production 4. Upon collection of cash Point of Sale/ During Production/ Completion of Production/ Collection of Cash Matching Principle (expense recognition) Expenses must be matched with revenues in the period in which efforts are made to generate revenues Expenses recognized when product produced, when labour (service) or product makes contribution to revenue Elaboration Full Disclosure Principle Disclosure of circumstances and events which make a difference to financial statement users E.g. lawsuits Elaboration Cost Principle Assets to be recorded at cost (relevant: price paid, assets sacrificed, commitment made, reliable: objectively measurable, factual, verifiable, result of exchange transaction) Basis of accounting. Criticism, irrelevant: after acquisition, not equivalent to market value or current value. Despite changes in inflation, follows monetary unit assumption: sufficiently constant. CONSTRAINTS Permit company to modify GAAP without reducing usefulness

Cost Benefit Constraint Value of information exceeds the cost providing it. Materiality Constraint

If the item does not make a difference in decision-making (material), GAAP does not have to be followed.