Accounting Transactions and Assumptions

Business Transactions

These are events that increase or decrease the economic resources and obligations of an entity which will affect an entity's present and future economic benefit.

            Events – is anything that happens or occurred.

Economic Resources    — are scarce means available for carrying on economic              activities.

Economic Obligations    — are present responsibilities to transfer economic          resources or provide services to other entities in the future.

            Economic Benefit          — flowing of cash and cash equivalent to the entity.

Kinds of Business Transactions

      1. Internal — transactions which only a certain entity participates

a. Production — process of combining or transforming resources into products   (either goods or services)

b. Casualties — are sudden substantial, unanticipated reduction in an entity's resource not being caused by other entities. Ordinarily, these events are called `act of God"

      2. External — are transactions that affect the entity and in which other entity participate.

a. Exchanges — are transactions that involve reciprocal transfers of resources or obligations between entities and other entities. Wherein one of the entity sacrifices resources or incurs obligations in order to obtain other resources or satisfy other obligations.

b. Non-reciprocal transfers — the transfer of resources or obligations is in one direction only.

i. Transfers involving the owners these kind of transfer involves either;

- The entity receiving resources from the owner while

increasing the owner's interest. (investing); or

- The entity transferring resources to its owner while the

owner's interest decreases (Withdrawal).

ii. Transfers involving other parties — in this kind of transfer, one of the two parties are either a mere beneficiary or a victim of the other party.

c. Others — resources of an entity may be changed by actions of other entities that do not involve transfers of the entity's resources or obligations.

Screening of recordable transactions

  

Underlying Assumptions and Principles

These are the norms that explain the reason why a certain activity is being done and/or a certain standard is being followed by preparers of accounting information.

Business, Entity Concept – although in legal terms, sole proprietorship and partnership owned businesses are one and the same with their owner/s, as accountants, we will assume that the businesses have a life that is separate and distinct from owner/s. Meaning, any transactions entered into, resources acquired, and obligations incurred by the businesses should be recorded and accounted for separately that of its owner/s.

Going Concern – since a business is considered to be a separate entity or person (as defined by law), we will also assume that the business' life will be indefinite and no plans of operation curtailment is being initiated unless evidence to the contrary will be visible. This is a very important assumption when we are to tackle valuations if resources and obligations.

Periodicity – even though the life of the business is assumed to be indefinite, as accountants, we should be able to divide such life into equal period for financial reporting and evaluation purposes. As discussed in earlier modules, the general objectives of businesses is to earn profit, however, such objective cannot be achieve immediately. It will have to follow certain steps or building block in achieving such objective, and it will be very helpful if the stakeholders will have a certain "deadline" periodically in evaluating results of operation and business status in order to formulate or reconstruct earlier strategies.

Two kinds of year

Calendar Year — it is a twelve month period which ends December 31.

Fiscal Year      — it is a twelve month period which ends at any date other than December. 31.

Monetary Value – since the objective of accounting is to provide information that are mainly financial in nature, we will have to draw a line between what are business transactions that are recordable and not. With such, two criteria are being set out, namely: (1) Transactions should affect the resources and obligations of the entity; and (2) Such should be reliably measurable in terms of monetary value. After the recording of such transactions, the purchasing power of the currency being used, which should only be a single currency (ie Peso), should be assumed to have no effect over the value of the recorded transactions, resources and obligations.

Cost Principle – it is also assumed that the value or the cost incurred during the acquisition of resources would be the same over its useful life. Therefore, we do not have to adjust its recorded or book value to reflect the effects of changing market values. However, there could be an exception to such rule, that is, book or recorded values can be adjusted when its difference with its market value is so material that it would not permit a reliable and relevant presentation of the company's financial status as of a certain date or time.

Accrual and Matching Principles – in business, some businessmen and stakeholder assumed that a business only earn income when cash is being received and expenses being incurred when cash is being used to pay such. In accounting, the assumption is not so. It is assumed that an income is already earned when the right to received cash has already risen and expenses are incurred when the obligation to pay is inevitable.