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There are five basic accounting assumptions for the accounting system which are:
Data recorded in an accounting system relates to an entity, that is, a specific business unit. An entity has an existence in its own rights, separate from its owners, creditors, employees.
Economic activities recorded in an accounting system are expressed in a common monetary unit: MXN pesos, USD, euros, etc.
Resources (assets) are recorded in an accounting system in monetary terms at their acquisition cost.
Unless there is evidence of the contrary, the assumption is that a business entity will continue its operations into an indefinite future.
The period of time chosen by a business entity to report the results of its economic activities through its financial statement (monthly, quarterly, every six months or annually)
Financial statements are used by third parties for various reasons. These third parties may be managers, potential investors, customers, unions, government agencies, and the general public.
There are four basic financial statements, which are:
An example of a Balance sheet:
An example of Income statement:
An example of a statement of retained earnings:
An example of a Statement of cash flow:
Government agencies are crucial in regulating and ensuring that businesses comply with laws and regulations while also reporting requirements.
Accounting systems provide information such as tax compliance (records of their reports of their tax liabilities), financial regulation (transparent financial information), business licenses and permits if applicable, etc.
Managers use the financial information provided bi the accounting systems for various reasons, including strategic planning, budgeting and forecasting, performance evaluation, investment decisions, risk management, among others.
The most important aspects that the internal users of financial information need to see are Solvency and Profitability
It is the ability to gain income (It is reflected in the Income Statement).
It is the ability to pay debts as they become due (The Balance Sheet reflects the company's solvency)
This information is used mostly by government agencies to assess and calculate the taxes owed by the company.
They also use it to audit and verify everything is in order, but if it's not, it's used to impose penalties and take legal measures to ensure tax compliance.