The life of a business is divided into specific time periods, usually, a year, to measure results of operations for each such time period and to portray financial conditions at the end of each period.

  1. This practice is based on the accounting assumption that the life of the business consists of a series of time periods and that it is possible to measure accurately the results of operations for each period. Comment on the validity and necessity of this assumption.
  2. What has been the effect of the practice on accounting? What is its relation to the accrual system? What influence has it had on accounting entries and methodology?

Short Answer

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  1. Time period assumption allows the accountant to estimate the progress of the firm and compare it with other organizations. It is essential to separate it into different periods so that the interested parties can make a periodical assessment of its performance.
  2. The periodic assumption has caused various accounting issues like depreciation of long-term assets as well as inventory pricing. The accrual system demands combining related revenues as well as expenses. Different accounting practices make periodical computations as precise as possible and also realize that it’s temporary in nature.

Step by step solution

01

Meaning of accounting assumption

Accounting assumptions are the basic assumptions underlying the practice and theory of financial accounting. They are broad working conventions for entire activities of accounting developed and accepted in the accounting profession. It brings about conformity in accounting practices.

02

The explanation for ‘a’

It is usually accepted in accounting that any measures of the progress of an enterprise for periods less than its entire life are temporary in nature and are subject to rectification. Estimation of progress and position for inconsistent time periods is essential to assist those who must take part in making decisions. It is not the consequence of presuming definite time periods as a measurable part of an entire life.

03

The explanation for ‘b’

The practice of measuring periodically has caused various accounting issues such as the depreciation of long-term assets, pricing of inventory as well as the need for revenue recognition tests. The accrual system demands connecting associated revenues as well as expenses, which becomes tough for an absolute time period with partial transactions in process at both the beginning as well as ending of the period. Many accounting practices like adjusting entries or recording corrections of previous periods arise directly from making computations of each period as correct as possible and identifying that they are interim in nature.

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Most popular questions from this chapter

BE2-10 (L06) Identify which basic principle of accounting is best described in each item below.

  1. Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected.
  2. Yahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.
  3. Oracle Corporation reports information about pending lawsuits in the notes to its financial statements.
  4. Gap, Inc. reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater.

Question: The issues that the FASB and IASB must address in developing a conceptual framework include all of the following except:

(a) should the characteristic of relevance be traded-off in favor of information that is verifiable?

(b) should a single measurement method such as historical cost be used?

(c) what are the key elements of asset and liability definitions?

(d) should the role of financial reporting focus on internal decision-making as well as providing information to assist users in decision-making?

Question: What are some of the differences in elements in the IASB and FASB conceptual frameworks?

What is meant by term “qualitative characteristics of accounting information”?

(Usefulness, Objective of Financial Reporting) Indicate whether the following statements about the conceptual framework are true or false. If false, provide a brief explanation supporting your position.

  1. Accounting rule-making that relies on a body of concepts will result in useful and consistent pronouncements.
  2. General-purpose financial reports are most useful to company insiders in making strategic business decisions.
  3. Accounting standards based on individual conceptual frameworks generally will result in consistent and comparable accounting reports.
  4. Capital providers are the only users who benefit from general-purpose financial reporting.
  5. Accounting reports should be developed so that the users without knowledge of economics and business can become informed about the financial results of a company.
  6. The objective of financial reporting is the foundation from which the other aspects of the framework logically result.
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