Fundamental Accounting Assumptions :
There are three fundamental accounting assumptions i.e. Going concern, Consistency and Accrual. It is generally assumed that financial statements are prepared on the basis of fundamental accounting assumptions.
Para 27 of the Accounting Standard–1 (ICAI) requires that if fundamental accounting assumptions are followed for the preparation and presentation of financial statements, no specific disclosure is necessary. However, if a particular accounting assumption is not followed, the facts should be disclosed.
- Going Concern : An entity is considered as a going concern if it is able to continue operations in the foreseeable future. Foreseeable means coming one or two years. It means it has no intention of discontinuance of business. It has no necessity of liquidation of organisation or discontinuance of major operations of the business.
- Consistency : Accounting policies are consistently followed over the accounting period i.e. from one period to another.
- Accrual : It means that financial statement is prepared on mercantile system only. Revenue and costs are recognised as and when they are earned or incurred and recorded in the financial statements of the period to which they relate.
Section 209(2) of the Companies Act, 1956 also requires pursuance of accrual basis accounting in the preparation and presentation of financial statements. It is one of the pre-conditions of truth and fairness of such statements. Thus, there is no option available to the corporate management to finalise accounts on cash basis. As per AS–1 (ICAI), other accounting assumptions like business entity, money measurement, matching are not fundamental accounting assumptions.
