In accounting, certain assumptions are fundamental for the proper treatment and reporting of non-current assets. These assumptions help establish the framework within which accounting policies are applied. Here are some key accounting assumptions relevant to non-current assets:
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Historical Cost Principle:
- Non-current assets are recorded at their purchase cost, which includes all expenditures directly attributable to bringing the asset to its intended use. This includes the purchase price, shipping costs, installation costs, and other related expenses.
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Economic Entity Assumption:
- This assumption stipulates that the transactions and assets of a business must be accounted for separately from the owners or other businesses. Thus, non-current assets are treated as separate entities from the personal assets of owners.
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Going Concern Assumption:
- This assumes that a business will continue to operate for the foreseeable future. As a result, non-current assets are assessed and classified under the assumption that they will provide utility and be utilized in operations over their useful lives.
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Accrual Basis of Accounting:
- Non-current assets are recorded when they are acquired, regardless of when payment is made. This basis of accounting recognizes expenses and revenues when they are incurred, aligning the recognition of asset depreciation with income generation.
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Matching Principle:
- Expenses associated with non-current assets, such as depreciation, must be recorded in the same period as the revenues generated from the use of those assets. This ensures that financial statements accurately reflect profitability and the cost associated with generating revenue.
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Conservatism Principle:
- When choosing among accounting methods, this principle advises that probable losses be recognized as soon as they are evident, while gains should only be recognized when they are realized. This cautious approach impacts how impairments of non-current assets are treated.
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Materiality Principle:
- This principle allows accountants to disregard certain accounting principles if the amount involved is not significant enough to affect decision-making. Non-current assets of minimal value may be expensed in the period incurred rather than capitalized.
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Consistency Assumption:
- Once a business chooses an accounting method for its non-current assets (e.g., depreciation method), it should use that method consistently from period to period, unless a change is warranted and disclosed.
These assumptions help ensure that the financial statements provide reliable and relevant information regarding non-current assets, enhancing both transparency and comparability for users such as investors, creditors, and regulatory agencies.