Question

6. List and define the underlying conditions, or assumptions, which have had an impact on the development of GAAP.

Answer 1

The underlying conditions/ assumptions, which have had an impact on the development of GAAP are as follows:

--Business entity: The company for which the financial statements are prepared is distinct and separate from the owners.

--Going concern or continuity : The assumption is made that the organisation will remain in business for an indefinite time frame.

--Monetary unit : Accountants requires certain standard of measure to bring financial transactions together in an appropriate way.

--Realization: Revenue must be recognized when the earning process is virtually complete and the exchange value need to be objectively determined

--Matching: This concept states to recognize the costs that are related with the recognized revenue

--Full disclosure: Accounting reports must disclose all facts that may influence the judgment of an informed reader

--Materiality: The approach involves the relative size and importance of an item to a business.

--Verifiability: The accountant need to adhere as closely as possible to verifiable data.

--Industry practices: Few business use accounting reports that do not conform to the general theory that underlies accounting

--Transaction approach : The accountant records only events that affect the business financial position and also can be reasonably determined in monetary terms.

--Accrual basis: Expenses need to recognized when incurred (matching concept), and revenue are to be recognized when it is realized (realization concept), and

--Consistency: The business must give the similar treatment to comparable transactions from period to period

--Conservatism : The measurement with the least favorable effect on financial position and net income in the current period need to be selected.

--Historical cost : Of the numerous values that could be used, the objective and determinable value should be selected

-- Time period With this assumption, inaccuracies of accounting for entity short of its complete life span are accepted.