When preparing their financial information, Felix only includes transactions related to FFF and not any personal transactions like the holiday he took to Japan. The entity may only report activities on financial statements that are specifically related to their operations.įor example, Felix’s Fancy Flowers (FFF) is a business that sells blooms. The financial statements are prepared under the economic entity assumption, meaning that the business itself (or ‘entity’) is separate from the owners of the business and any other businesses. Accountants make four assumptions in the preparation of financial statements The economic entity These assumptions are made by accountants and users of accounting information. Accounting concepts is an interchangeable term for the assumptions of accounting. In some textbooks and online sources you may see references to accounting concepts. These are the same regardless of whether you are following IFRS or US GAAP – things do get more complicated when you get into some specific accounting transactions – but that is something to worry about only if you head into an accounting major or specialisation □ Assumptions of accounting In the following paragraphs we will discuss the assumptions and principles of accounting. Want more details on the difference between IFRS and GAAP? Check out this piece from Harvard Business School. At the introductory level, the main principles, assumptions and concepts of accounting are very similar between IFRS and GAAP. The United States has the Financial Accounting Standards Board which acts in a similar role as the IASB and they issue the GAAP – General Accepted Accounting Principles. The majority of the world’s accounting is conducted in accordance IFRS with the main exception being the USA. In Australia, the Australian Accounting Standards Board (AASB) implements the IFRS with a few small tweaks for Australian regulatory requirements – but overall it can be said that we are following IFRS. The IASB documents these standards in the International Financial Reporting Standards – usually referred to as IFRS. That is, revenue in Country A means the same thing in Country B. The International Accounting Standards Board (IASB) is the global body responsible for setting consistent standards and requirements to allow users of accounting information to make decisions with confidence in that information. But how can businesses be compared and evaluated against each other with any level of reliability? That comes from having a common set of accounting principles, assumptions and concepts that are the same worldwide. The people and entities interacting with businesses all around the world use accounting information to make decisions every single day. Assumptions and principles used in accountingĪmanda White CDU Business School Mitchell Franklin Patty Graybeal and Dixon Cooper
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