Ask Joey ™ a Question

What are the key accounting assumptions in financial statements?

There are a handful of key assumptions and principles used to define accounting, which provides the structure for how a business “accounts” for the financial transactions and results of the business.

1) Economic entity: This assumption relates to the idea that all activity in the financial statements relates only to the legal entity and does not include activity from other businesses or personal transactions of the owners.

2) Monetary unit: The monetary unit principle assumes that money (e.g. US dollar) is the primary unit of measurement and that all transactions and/or economic events will be measured in a form of currency.

3) Going concern: Financial statements are required to be prepared under the “going concern” basis of accounting, which means that unless otherwise stated, management does not see any major risks that would cause the entity to not continue to operate into the future.

4) Periodicity: The periodicity assumption means that a company’s economic activities can be divided into relevant reporting periods (annual, quarterly, monthly).

5) Matching principle: This is basically addressing the fact that revenue and expenses should be recognized in the period they are earned or incurred. This more commonly known as the accrual method, which is required by U.S. GAAP.

6) Qualitative characteristics: These characteristics include comparability, verifiability, timeliness, and understandability. These characteristics enhance the usefulness of information in order for the financial information to be relevant and faithfully represented.


You might also be interested in...

  • July 2021 Changes to The CPA Exam: Everything You Need to Know

    Change is right around the corner! The talk of the (CPA) town is that changes are upon us and they are coming quickly. While this is not an overhaul in the way that CPA evolution will be in 2024, there are changes that are being made to all four sections (FAR, REG, AUD, and BEC) […]

  • 2021 AICPA Released Questions

    Buckle up and get ready to crush the CPA exam! The AICPA has released additional multiple choice questions for BEC, AUD, REG, and FAR. We’re beginning to incorporate the questions into the Universal CPA Review platform and we will be uploading videos for certain questions to each of the respective pages below. Creating a high […]

  • AICPA 2021 Released Questions for BEC

    The moment we’ve all been waiting for! Additional question have been released by the AICPA for BEC! The topics are very random, so its a good way to test your understanding if you have been studying. If you haven’t been studying for BEC, it is a great way to see what you will be touching […]