What are the Fundamental accounting Assumptions underlying Financial Statements?

Fundamental assumptions, basic assumptions or fundamental accounting assumptions mean the accounting concepts that have been considered and followed while recording financial information. As information needs are different from person to person, entity to entity and situation to situation thus such assumptions vary.

But remember one thing fundamental accounting assumptions DOES NOT mean the rules that must be followed to prepare financial statements or in any way means that if entity does not follow these assumptions then financial statements are faulty.

Different authors have defined fundamental accounting assumptions differently.

According to some there are only three basic assumptions under every accounting information i.e.:

  1. Going concern concept
  2. Accrual concept
  3. Consistency

And some have stated that there are five basic assumptions:

  1. Business entity concept
  2. Going concern concept
  3. Accruals concept
  4. Money Measurement concept
  5. Consistency

However, if we are preparing financial statements according to IAS 1 then fundamental accounting assumptions for preparing financial statements are as follows:

  1. Going concern – Entity is a going concern
  2. Accrual basis of accounting – all financial statements except cash flow information must be prepared following accrual basis of accounting
  3. Consistency – Consistency in presentation and classification of financial statements items
  4. Materiality and aggregation – Material class of similar items are presented separately
  5. Offsetting – Assets against liabilities and incomes against expenses cannot be offset unless permitted or required by IAS.

Among these five, first three are given more importance as they least affected by situations and other requirements of IASs.

The five items listed above are basically what a normal user of information have in his mind for every financial statement and that is why they are called basic accounting assumptions underlying financial statements.

However, according to IASB Framework for Preparation and Presentation of Financial Statements underlying assumptions are:

  1. Accrual Basis
  2. Going Concern

Definitely these are not the MUST follow rules for preparation and entity can deviate from them where entity will have to follow the instructions regarding what should be done in case of deviation from such basic accounting assumptions for preparing financial statements.

Remember, IAS 1 is part of a regulatory framework and is meant to be detailed and more demanding. Whereas IASB Framework is part of a conceptual framework which provides conceptual guidelines to be followed and is more generalized in nature.

2 COMMENTS

  1. 3 errors are: Error of omission, error of compensation and error of commission.

  2. Which 3 errors that will cause dufference in the creditors account balance and the creditors ledger balance? Nd u can answer me by email.

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