Unit 4 Assignment 1 1. Accrual Basis Accounting: Under the accrual basis accounting, business transactions specifically those relating to income and expenses are recognized and recorded in the books the moment the substance of the transaction has been perfected. Generally Accepted Accounting Principles (GAAP) prefers that financial statements are based entirely on the accrual basis accounting instead of the cash basis accounting. In its simplest terms, the accrual basis accounting assumes that income is recognized when earned regardless of the date of payment. On the other hand, expenses are recorded when incurred regardless of whether it was paid in cash or in credit terms.
Going Concern Assumption: Every financial statement reports a business firm’s capacity and performance based on the understanding that the business will continue its operations indefinitely – except if there is evidence that the business firm will close its operations in the near future. A business firm whose status is going concern reports assets based on their historical value. Similarly, assets carry a book value equivalent to the difference between their historical value and accumulated depreciation. Under this assumption, market values are ignored as the business firm will continue operating indefinitely.
Accounting Entity Assumption: Basically, the accounting entity assumption is the same as the business entity principle. In this system, a business firm is considered a separate and distinct entity from its owner. The accounting entity assumption calls for the separation of accounting records between a business firm and its owner.
Time Period Concept: The time period concept holds the idea that business transactions should be recorded when they occur. Recording of business transactions should be done within the course of the business firm’s operating period – either at a fiscal year