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Accounting period assumption

Accounting period assumption

Accounting period assumption measure activities for a specified interval of time, called the accounting period. The time periods vary entity to entity and in accordance to the need of the management. it may be monthly, quarterly, biannually or annually. But one year is the usual accounting period for the purpose of reporting to outsiders.

Luca Pacioli, the first author of accounting text, wrote in 1494:

“Books should be closed each year, especially in a partnership, because frequent accounting makes for long friendship.”

Most corporate bylaws require an annual report to the shareholders and income tax reporting is also in an annual basis.

Common Accounting period assumption periods are as follows:

Accounting period assumption

Accounting period assumption

Example:

  1. Most companies publish annual report (yearly) so that the readers of the report can assess the overall performance of the business meaningfully. If it is published haphazardly i.e. without maintaining any accounting period, the information cannot be properly assessed, compared or even understood by the users.
  2. Accrued salary of a financial year is added with the salary of that financial year though this may be received in next financial year, For the some purpose, any prepaid expense or income is deducted in the income statement.

Straight from practice:

Companies Accounting Period (one year) ended on
Amazon.com Inc. December
Microsoft.com
Apple Inc.
Aaron’s, Inc.
Ablitech, Inc.
ABX Air
Ametek
AT&T Inc.
Baker Hughes
Beckman Coulter
Bissell, Inc.
CA Technologies
CiCi’s Pizza
Cape Air
Diamond Foods
DeVry, Inc.
Domino’s Pizza
FedEx

Accounting period assumption

Principles:

Historical cost principle:

Cost is the amount given up to purchase an asset or service accepted accounting practice requires that assets and liabilities should be recorded and reported on the basis of acquisition cost price. Because for a variety of reasons, the real worth of an asset or liability may change with the passage of time. other valuation very likely market value is not considered. cost principle has an added advantage over other valuation cost is both reliable and relevant. Cost is reliable because it is factual and verifiable. cost is relevant because it reporting purchases of asset or services at cost is more objective than reporting a manager’s estimate of their value.

Market value or other valuation is an estimate and not reliable, Moreover market value is also subject to change. it is not stable.

Accounting period assumption

 

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