8.

Accounting assumptions and principles

A Assumptions
Accountants have to follow a number of assumptions, principles and conventions
when they write accounts and financial statements. An assumption is something
that is considered to be true and these are the main assumptions:
-

The separate entity or business entity assumption business is separate

from its owners
The time-period assumption that business can be divided into time periods
such as financial year
The continuity or going concern assumption business will continue so the
current market value of its assets is not important
The unit-of-measure assumption all transactions are in a single currency. If
a company has subsidiaries in different countries, they all have to convert
their results into one currency in consolidated financial statement for all
companies.

B Principles
The most important principles are:
-

The full-disclosure principle financial reporting must include all significant

information
The principle of materiality very small and unimportant amounts do not
need to be shown
The principle of conservatism among different accounting methods you
choose the one which will not over-estimate assets or income
The objectivity principle accounts should be based on facts and should be
verifiable by internal and external auditors.
The revenue recognition principle the revenue is recorded when a service is
provided or goods delivered, not when they are paid for.
The matching principle each cost or expense related to the earned revenue
must be recorded in the same accounting period as that very revenue.

9. Depreciation and amortization

A Fixed assets
A company`s assets are divided into current and fixed assets. Current assets are
cash and inventory which will be converted into cash in less than a year. Fixed
assets are buildings and equipment. Fixed assets wear out and are depreciated
their value on balance sheet is reduced every year that is part of the cost of the
asset is deducted from the profits each year.

Using the accounting technique of depreciation, we do not have to charge the whole
cost of a fixed asset against profits in the year of purchase, but during all years that
it is used.
B Valuation
Building, machinery and vehicles form fixed assets. Land is not depreciated because
it tends to appreciate or gain in value. Such appreciating fixed assets like land are
occasionally being revalued at either current replacement cost (how much it would
cost at that time) or at net realizable value (how much it could be sold for).
Appreciation is recorded in countries that use inflation accounting systems.
When companies use historical cost accounting, they record the original purchase
price of assets, not an estimated market value the price for which it could be sold
now.
C Depreciation systems
Straight-line method is the most common system of depreciation for fixed assets. It
means that equal annual amount is charged against profit during life time of the
asset e.g. deduction of 10% of the cost of an asset from profit every year for 10
years. Many continental European countries apply accelerated depreciation which
means that business can deduct the whole cost of an asset in a short time. This is
an incentive to investment, because if a company deducts the total cost of an asset
in one year, it will reduce its profit and therefore the amount of tax to pay. Thus new
assets would equal zero on a balance sheet. But in Britain this would not be
considered a true and fair view of the company`s assets.