Understanding Accounting Postulates
An Accounting Postulate is a presumption based on previous accounting practice (s). The accounting rules that define how transactions are handled and documented are built on accounting postulates.
Accounting postulates are fundamental assumptions and are not typically mentioned in financial statements by a corporation. For instance, a postulate in the United States can state that all numbers should be expressed in dollars. The postulates used most frequently in modern accounting are listed below in this article.
The purpose of accounting postulates is to ensure that financial statements are accurate, consistent, and comparable. These postulates serve as a framework for financial reporting and provide a basis for decision-making.
Major Accounting Postulates
Accounting postulates are the basic principles that underpin financial accounting. They provide the foundation for preparing financial statements and ensure that the information presented is reliable, consistent, and relevant. Below, we discuss some notable/ major accounting postulates in detail:
The entity concept states that the business entity and its owners are separate entities. This postulate assumes that the business's financial transactions are distinct from its owners' personal transactions. The entity concept ensures that financial statements reflect only the business's financial activities and not those of the owners. This postulate is crucial in determining the financial position and performance of the business alone.
For example, if a business owner takes out a loan, the loan should be recorded as the business's liability rather than as the owner's personal liability. This ensures that the financial statements accurately reflect the business's financial position.
Going Concern Concept
The Going Concern Concept assumes that the business will continue to operate indefinitely. This postulate is vital in determining the financial position and performance of the business as it enables accountants to prepare financial statements based on the assumption that the business will continue to operate.
For example, a business that is not a 'going concern' may have a lower value as potential buyers may be hesitant to invest in a business that is not expected to continue operating.
Money Measurement Concept
The money measurement concept states that only transactions that can be expressed in monetary terms should be recorded in the financial statements. This postulate is essential as it ensures that financial statements are reliable and comparable.
For example, if a business has a large social media following, it cannot be recorded in the financial statements as it cannot be expressed in monetary terms.
The cost concept assumes that the assets of a business are recorded at their historical cost. This postulate ensures that the financial statements reflect the actual cost of the assets, which is important in determining the profitability and financial position of the business.
For example, if a business purchases a piece of equipment for $10,000, that equipment should be recorded in the financial statements at its original cost of $10,000, even if it has appreciated (or depreciated) over time.
This postulate requires that expenses must be matched with the revenue that a business generates. It means that expenses are recognized in the same accounting period as the revenue generated.
This postulate states that businesses must use the same accounting methods and procedures for similar transactions. It means that financial statements must be consistent over time to ensure comparability.
Dual Aspect Concept
The dual aspect concept states that every financial transaction has two aspects, a debit and a credit. This postulate ensures that the accounting equation (assets = liabilities + equity) is always balanced. The dual aspect concept is crucial in ensuring the accuracy and reliability of financial statements.
For example, if a business purchases a piece of equipment for $10,000, the transaction will be recorded as a debit to the equipment account and a credit to the cash account.
All the major accounting postulates are the fundamental principles that underlie financial accounting. They provide the framework upon which financial statements are prepared and ensure that the information presented is reliable, consistent, and relevant. By following these principles, accountants can provide stakeholders with reliable financial information to support decision-making.
Significance of Accounting Postulates
Accounting postulates are fundamental principles that provide the foundation for the development of accounting principles and practices. These postulates are generally accepted as true and are considered necessary to ensure that financial statements accurately represent the financial condition and performance of an organization. The significance of accounting postulates lies in their ability to ensure consistency, reliability, and comparability in financial reporting.
The following are some of the significant roles of accounting postulates:
In this way, accounting postulates are crucial for ensuring consistency, reliability, and comparability in financial reporting. By providing a set of principles that govern financial reporting, postulates help to enhance the credibility of financial statements, making it easier for stakeholders to make informed decisions. Accounting postulates also play a vital role in developing accounting standards and helping ensure accountability for organizations.
The Bottom Line
Accounting postulates provide a foundation for developing accounting principles and practices, which are essential for ensuring the accuracy and reliability of financial statements. By adhering to these postulates, organizations can ensure that their financial statements accurately represent their financial condition and performance, which is crucial for making informed financial decisions.