PRESENTATION TOPICSTABLE DOLLAR ASSUMPTION

PRESENTED BY

FAIZAN NAHEED RAJADANISH FAROOQ

CONTENTS

• General accepted accounting principles.• Importance of accounting assumptions.• Stable dollar assumption.• Examples.• Monetary unit & Stable dollar assumption.• Drawbacks.

GENERAL ACCEPTED ACCOUNTING PRINCIPLES

A collection of rules and procedures and conventions that define accepted accounting practice, includes broad guidelines as well as detailed procedures.

Relevant Information

Reliable Information

Comparable Information

Affects the decision of its users.

Is trusted by users.

Used in comparisons across years & companies.

STABLE DOLLAR ASSUMPTION

STABLE DOLLAR ASSUMPTION

• The stable dollar assumption when using money as a measuring unit and preparing financial statements expressed in dollars, that the dollar is a stable unit of measurement.

EXPLANATON

• Money is the unit of measure employed in recording financial transactions.

• Knowing the money values assigned to financial transactions enables the user of financial statements to estimate the profitability of a business enterprise.

EXPLANATION

• A dollar of previous is not the same as dollar of today because the effects of inflation.

• The value of dollar changes over time but accountants cannot build useful statements with unstable units of measurement.

• Therefore a financial statement is prepared on the basis of stable dollar concept.

EXAMPLE

Assume that in 1970, you purchased land for $20,000. In 1990, you sell this land for $30,000. Under generally accepted accounting principles, which include the stable dollar assumption, you have made a $10,000 gain on the sale. Economists would have point out, however, that $30,000 in 1990 represents less buying power than did $20,000 in 1970. When the relative buying power of the dollar in 1970 and 1990 is taken into consideration, you come out behind on the purchase and the sale of this land.

IMPORTANCE OF ACCOUNTING ASSUMPTIONS

• Accounting have established group of assumptions, those assumptions are the basics of financial accounting. At the same time, assumptions are not accounting principles, as they are more of agreed upon rules. Assumptions are traditions and customs, which have been developed over a period of time and well-accepted by the profession. Basic accounting assumptions provide a foundation for recording the transactions and preparing the financial statements there from.

CHANGE IN THE VALUE OF DOLLAR

• If you had $100,000 at the beginning of 2007, on December 31st you were able to buy$90,400 worth of goods.

• 5-year change: If you had $100,000 at the beginning of 2003, by the end of 2007 you could only buy $62,800 worth of goods.

MONETARY UNIT & STABLE DOLLAR ASSUMPTION

• The monetary unit assumption is that in the long run, the dollar is stable—it does not lose its purchasing power.

• One aspect of the monetary unit assumption is that currencies lose their purchasing power over time due to inflation, but in accounting we assume that the currency units are stable in value. This is alternatively called stable dollar assumption.

EXAMPLE

• The company's property, plant and equipment on 2009 balance sheet amounted to $2 billion. During 2010 inflation was 10%. The monetary unit and stable dollar assumption prohibits any adjustment to current or prior period figures to account for the inflation.

• The BP oil spill in Gulf of Mexico was a natural disaster but accounting only reports the financial impact in the form of claims paid, damages paid, cleanup costs, etc. This is due to the limitation imposed by the monetary unit assumption.

DRAWBACKS

The currency unit assumption works on the basis that the currency unit will hold its value for the foreseeable value. This means accounts prepared on this assumption will not take account of possible future inflation or variations in the domestic value of income received in foreign currencies.

ANY QUESTION