Underlying Assumptions, Principles, and Conventions

Financial accounting relies on the following underlying concepts:

• Assumptions: Separate entity assumption, going-concern assumption, stable monetary unit assumption, fixed time period assumption.
• Principles: Historical cost principle, matching principle, revenue recognition principle, full disclosure principle.
• Modifying conventions: Materiality, cost-benefit, conservatism convention, industry practices convention.
  Financial Statements

Businesses have two primary ives:

• Earn a profit
• Remain solvent

Solvency represents the ability of the business to pay its bills and service its debt.

The four financial statements are reports that allow interested parties to evaluate the profitability and solvency of a business. These reports include the following financial statements:

• Balance Sheet
• Income Statement
• Statement of Owner"s Equity
• Statement of Cash Flows

These four financial statements are the final product of the accountant"s analysis of the transactions of a business. A large amount of effort goes into the preparation of the financial statements. The process begins with bookkeeping, which is just one step in the accounting process. Bookkeeping is the actual recording of the company"s transactions, without any analysis of the information. Accountants evaluate and analyze the information, making sense out of the numbers.

For the reports to be useful, they must be:

• Understandable
• Timely
• Relevant
• Fair and ive (free from bias)