Question

. Discuss any three examples of accounting period assumption

Answer 1

The accounting period assumption is a assumption of income measurement. This is the assumptions that you make while measuring your net business income. It is important to note that the assumption impact the amount expenses and revenues to be reported.

The assumption of accounting allows you – the business owner, to divide your operational business activities into time periods after which you will be compiling accounting information during the bookkeeping exercise for reporting. It allows you assign expenses and revenues a particular accounting period of any length. Note that an accounting period that is less than a year is known as an interim period while an accounting period of 12 months is known as the fiscal year.

However, despite the simplicity of the accounting period assumption, some transactions cannot be assigned to a particular accounting period easily. Some of these transactions require you to estimate and adhere to the assumption of periodicity, which allows for a systematic collection of revenues and expenses. For example, depreciation expenses associated with your business premises and other fixed assets for given period depends on your estimation of how many years you will use the fixed asset.

In cases where the revenue and expense are not connected, they can be allocated to different accounting periods in a systematic way. Examples of unrelated expense and revenue are the interest revenue from an investment and amortization expense.

The process of allocating income and expenditures to a particular accounting period requires you to determine (assumption) the length of the accounting period.

Example 1

The Meta company provides services valuing $2,500 to Beta company during the first quarter of the year. The Beta company will pay the cash for these services next quarter. According to time period assumption, if Meta company prepares its financial statements at the end of the first quarter of the year, it must include this service revenue of $2,500 in its income statement for the first quarter.

Example 2

The Meta company incurs expenses of $1,200 during the first quarter of the year. The cash for these expenses will be paid next quarter. The time period assumption requires Meta company to disclose these expenses on the income statement for the first quarter of the year.

Notice that the two examples given above show that the time period assumption is closely related to matching principle and revenue recognition principle of accounting.

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