There are two underlying assumptions for the preparation of financial statements, these are
- the accrual basis; and
- going concern
Under the accrual basis, the effects of transactions and other events are recognised when they occur, and not as cash is received or paid. Under the accruals basis, events are recorded in the accounting records and reported in the financial statements of the periods to which they relate.
Financial statements prepared on the accrual basis inform users not only to past transactions when cash was paid or received but also of obligations to pay cash in the future and of cash or its equivalents to be received in the future.
Going Concern Basis
The going concern basis of accounting is the assumption in preparing the financial statements that an entity will continue in operation for the foreseeable future and does not plan to go into liquidation, and will not be forced into liquidation or to curtail its operations.
If such an intention or need exists, the financial statements may have to be prepared on a different basis and, if so, the basis used is disclosed. The going concern assumption is very important for the valuation of assets, as they may require valuation on a break-up basis if the company will cease trading.