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August 24, 2019, 09:45:57 pm

Author Topic: Question about assumptions  (Read 156 times)  Share 

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dunno2012

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Question about assumptions
« on: July 16, 2019, 08:49:48 am »
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Can someone explain the difference between Period assumption and Accrual basis assumption?

Thanks

jurisprudence

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Re: Question about assumptions
« Reply #1 on: July 17, 2019, 04:22:59 pm »
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Hi!

The period assumption requires reports to be prepared for a particular period of time, in order to obtain comparability of results. To break this into more simplistic terms, it means that the business must divide the life of a business into reporting periods.

Without this assumption, the life of a business would continue indefinitely. Revenues and expenses would accumulate continuously (as there would be no closing of accounts), and we would not be able to distinguish between present and future economic benefits. You would be unable to prepare reports such as the Income Statement and Cash Flow Statement which detail income and cash flows for ‘the period ended ___’, as no such period would exist. This restricts a business’s ability to obtain comparable and relevant information.

Alternatively, the accrual basis assumption details when items are recognised in reports. It comes from the concept of accrual accounting, which states that revenues earned should be matched against expenses incurred for the period.

We see this assumption upheld in things such as our balance day adjustments and credit sales, which are included in the calculation of profit when they meet the definition of an expense or revenue (despite not having a corresponding cash flow).

The reason these assumptions are commonly confused, is as the period assumption enables the accrual basis assumption. First, the period assumption divides the life of a business into periods. Then, the accrual basis assumption allows us to determine which period revenues and expenses should be recognised in.

Hope this helps!

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