Accounting Characteristic, Assumptions and Principles

Qualitative Characteristics of Accounting Information

Relevance

• Can influence or impact a decision
• Can confirm previous predictions
• Can predict future results

Faithful Representation

• Accurately reflect the condition of the business
• Information should be:
• Complete
• Neutral (free of any bias)
• Free of any material error

Comparability

• Comparable to other companies
• Comparable to same company at another point in time
• Achieved by using consistent accounting methods

Verifiability

• Information can be verified by an independent accountant
• Information can be reproduced by a third-party who has access to the same facts and assumptions

Timeliness

• Accounting information should be made available to users in time to be used in decision-making

Understandability

• Quality of information is understandable by someone with reasonable knowledge of business and economic activities.

Accounting Assumptions

Separate-Entity Assumption

• Transactions and activities conducted by a business are separate to those conducted by its owners.

Unit-of-Measurement Assumption

• Accounting information should be reported in the domestic currency of the business. Example: Canadian companies should report earnings in Canadian dollars.

Continuity (Going Concern) Assumption

• Businesses are assumed to continue operating for the foreseeable future.
• Business should continue operating long enough to meet all of its commitments, obligations and objectives.

Periodicity Assumption

• Accounting information can be separated into artificial periods of time. Example: months, quarters, years

Accounting Principles

The Historical Cost Principle

• Assets must be recorded their historical cost.
• Historical cost is the total amount of cash and non-cash items exchanged for the asset.
• Assets should not be recorded at their market value.

• Expenses should be reported in the same period in which the related revenues were earned.