Going Concern, Consistency and Accrual are fundamental Accounting Assumptions

Fundamental Accounting Assumptions

Going concern, Consistency and Accrual are the 3 fundamental accounting Assumptions.

(a)               Going Concern Concept: According to this concept it is assumed that the business will continue for a foreseeable future (i.e., fairly long time to come).  There is neither any intention to close the business or scale down its operations significantly nor any necessity to close the business.

It is on this basis that a clear distinction must be made between capital expenditure (i.e., assets) and revenue expenditure (i.e., expenses).  It is because of this concept that fixed assets are recorded at their original cost and depreciated in a systematic manner without reference to their current realisable value.

 (b)               Consistency Concept: According to consistency concept, accounting policies once selected should be applied consistently year after year to maintain its comparability. Accounting policies once selected may be changed under the following exceptional circumstances:

(i)                 If the law requires, or

(ii)              Accounting Standards require; or

(iii)            the change will result in better presentation.

 (c)               Accrual Concept: Accrual concept prescribes that transactions are recorded when they occur irrespective of whether cash is actually received or paid.

• Accrual concept prescribes that revenue is recognised when sale is made i.e., when ownership of goods is passed to the buyer or services are rendered when services are performed irrespective of whether cash is actually received or not; and
• Expenses are recognised when they are incurred irrespective of whether cash is actually paid or not.