Postulates and Framework

Postulates

1.

Accounting Entity

• The entire business unit that is being measured should be reported on, regardless of legal entity.

Time period

• Business units are required to report the changes in their wealth periodically.

Monetary Unit

• The activities of a firm need to be measured in monetary terms. The monetary unit depends on the country in which the business resides. In the United States, dollars are used.

Going Concern

• The financial statements should be based on the assumption that an entity will continue its operations for the foreseeable future.

2.

Accounting Entity

• An accounting entity can be either a business or subdivision of a business that engages in economic activities, has economic assets and resources that must be accounted, and is separate from the personal dealings of its owners. Once an accounting entity is determined, transactions within the specific unit are accounted. The entity should not be flexible or regularly changed, in order to insure the accuracy of accounting.

Time period

• The constraints of reporting, using arbitrary time periods, cause a number of impediments. The initial obstacle surrounding the accounting period concept was how to accurately apply cut-off procedures involving cash and non-cash activities.  This issue was mainly resolved by using accrual accounting methods, depreciation allocations, and percentage-of-completion accounting, to handle cut-off issues.

Monetary Unit

• Money is the common denominator in business. Nonetheless, even this simple postulate is becoming an issue, with the increased use of barter transactions. Customer referrals, or business in exchange for free or discounted services, are also problematic. It’s taking the old banking practise, of keeping deposits at your bank in exchange for free services, to the next level.

Going Concern

• Recession resulted in the unexpected failure of several Fortune companies. The swiftness and...