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Chapter 2: Q2-13Q (page 61)

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

Expert verified
  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鈥檚 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

Question: Briefly describe the types of information concerning financial position, income, and cash flows that might be provided (a) within the main body of the financial statements, (b) in the notes to the financial statements, or (c) as supplementary information.

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