Chapter 3
The Accounting Framework
67
Assumptions
There are three basic assumptions underlying all accounting information that is prepared in accor-
dance with either ASPE or IFRS.These assumptions are necessary for users to rely on the informa-
tion presented.
The
business entity assumption
states that accounting for a business must be kept separate from
the personal affairs of its owner or any other business. The owner of a business cannot record
personal transactions on the income statement or the balance sheet of the business. The financial
statements of the business must reflect the financial position of the business alone. Any personal
expenses of the owner are charged to the owner and are not allowed to affect the operating results
of the business. Financial statements of a business can be assumed to only contain items that
pertain to the business.
The
going concern assumption
assumes that a business will continue to operate into the foresee-
able future. Determining the value of the assets belonging to a business that is alive and well is not
complicated. For example, items such as property, plant and equipment are listed on the balance
sheet at their cost, or original purchase price. However, if an accountant deems that the business
will not be able to continue operating into the foreseeable future, the balance sheet must instead
show the value for which the property, plant and equipment could realistically be sold. When a
company is going out of business, the value of the assets usually suffers because they have to be sold
under unfavourable circumstances. Companies at risk of going out of business must include this
information in the notes to their financial statements.
The
monetary unit assumption
requires that accounting records are expressed in terms
of money. Accounting records should all be reported in a single currency, such as Cana-
dian dollars or euros. This allows accountants to assign monetary values to business
events. For instance, suppose that a company hires a salesman. The event of officially
hiring the employee is not reflected in the company’s accounting records since a value
cannot be easily assigned to the event (i.e. expressed in terms of money). However,
over time, the financial impact of the hiring will be evident (e.g. recognizing the salary
expense for the salesman and realizing an increase in sales). Furthermore, it is also assumed that the
unit of measure used in the accounting records remains fairly constant over time and that transac-
tions can be measured relevantly in current monetary units. That is, inflation (a rise in prices) or
deflation (a drop in prices) is ignored when comparing dollars of different years.
Principles
The following section will outline some of the basic accounting principles outlined by the conceptual
framework of accounting. Accountants may need to use their professional judgment from time to
time to apply these principles.The judgments must be in line with the objective of financial reporting
and provide the most useful information for the users.
€
£
¥
$
