Question

Accounting conventions are common guidelines and practices—principles, assumptions, and constraints—followed by accounting professionals when recording business transactions. These accounting conventions are standards used by all business organizations, so it is important to understand what they are and how to apply them.

• Economic entity assumption.
• Going concern assumption.

Answer 1

a) Economic Entity Assumption:- Economic entity assumption is an assumption which states that owner of the business will be treated separate from business entity while recording transactions and preparing financial statements.

One of the objective of the financial statements is to provide true and fair view of financial transactions. Therefore entity's owner is treated separately and any amount given or taken by the owner from the business is termed as Owner's Capital or Owner's Withdrawals respectively.

b) Going Concern Assumption:- It is a basic accounting assumption which states that the business of the company will continue for the long period and will not liquidate in the near future. It is a very important accounting assumption. Almost all the accounting is based on this assumption.

For example, financial statements are prepared after a fixed interval of time (i.e. quarter, year) which assumes that business will continue forever, Depreciation on fixed asset charged is also based on this assumption, the valuation of fixed asset at their cost and not on their current value is also based on this assumption.