When we deal with finances and accounts, there needs to certain guidelines and rules based on which we can evaluate our performances. This set of rules and regulations define whether a business is doing its accounting job right or not. In addition, these rules and regulations will help you identify any deviations at the very moment before they create troubles for your business.
The set of rules to ensure the to identify whether the operations of a business are as per the defined rules and standards is known as accounting assumptions. These assumptions are a source to align the financial transactions and statements of a business so that they are free of mistakes and errors. With errors in your financial records, you will not be able to make balanced and accurate financial statements. That is why it is necessary to follow certain rules while recording these necessary financial and accounting details.
Keep scrolling down the article to know about accounting assumptions and their common types implemented in organizations.
Top 6 Types of Accounting Assumptions Important For Organizations
Based on which financial transaction to record and for how long to record each transaction, there are various rules. These rules define whether a business needs to record certain transactions or not. Even if they do, then can they prove these transactions and records. Accounting assumptions are a great source for businesses and organizations to record the amounts that they can prove and defend when needed.
Following are some types of accounting assumptions that every organization must consider.
One of the most important assumptions for ensuring the relativity of different account records is the consistency assumption. This is because every business or organization uses different accounting methods over different accounting periods. This assumption makes sure that the business uses the same accounting method so that the records of different methods can be compared without difficulties. This way, you can improve the accuracy of your financial records if the accountants can bring consistency. Otherwise, the best accounting firms in Dubai can help you out in implementing the same accounting methods throughout all periods.
Continuity assumption is also known as the ongoing concern assumption. Basically, this is an assumption made to identify whether a business will operate its operations in the future or not. Based on your previous account records, these assumptions are made, and these could also help you improve your performances. The improved performances will increase the chances of a business continuing its operations in the foreseeable future.
The reliability assumption is also known as the objectivity assumption. Reliability assumption set rules for recording the types of transactions. For example, it defines that only those records or transactions should be recorded in your statements which can be proved. By proving the transactions means you must have the receipts and invoices for each of the transactions made. If a business or organization fails to verify its transactions, it can create various troubles.
Time period assumptions
As per the above-metioned points, we know that different accounting methods are used over different accounting periods. The time period assumption sets rules for businesses about how long they should implement an accounting method. This assumption is the reason there is a consistency in the accounting records. With the help of this assumption, the readability and the understandability of the people reading the financial statements increases. And the comparison of records for various accounting cycles becomes easier.
Economic entity assumption
The accounting issues are not only higher for big organizations and setups, but small businesses also get affected when there are no defined rules. Economic entity assumption is one of the accounting assumptions that play a significant part in resolving economic issues for small businesses. This assumption states that personal economic or financial records should be recorded separately from business records. A business owner’s financial records should not be mixed with the business records. For example, you must not enlist the expenses of a business owner with the business expenses.
Money measurement assumption
The financial activities and transactions going around in an organization or business must be recorded. The money measurement assumption states that every transaction within an organization that is worth recording must be recorded. Keeping a record of every business transaction will help you eliminate financial imbalances. For that purpose, you must have the bookkeepers or the accountants active.
Make your calculations and records accurate!
Following the assumptions mentioned above will enable you to make your financial statements and transactions accurate and correct. When you have accurate financial records, then you can easily defend them and prove them whenever the authorities ask you to do. But you must have the accounting experts to make these records and implement these assumptions.