Accounting Online Program Certification Practice Test

What is one of the assumptions in the conceptual framework of accounting?

1. Historical cost principle

2. Going concern assumption

3. Revenue recognition principle

4. Materiality threshold

The correct answer is: Going concern assumption

The going concern assumption is a fundamental principle in the conceptual framework of accounting. It asserts that an entity will continue to operate indefinitely, or at least for the foreseeable future, unless there is evidence to the contrary. This assumption is crucial because it underpins the basis for preparing financial statements. If a business is presumed to operate indefinitely, it can defer the recognition of certain expenses to future periods, and its assets can be valued on a continuous operation basis rather than a liquidation basis. In this context, understanding the going concern assumption helps stakeholders assess the financial stability and longevity of a company. Without this assumption, financial reporting would look quite different, as valuations would rely on short-term liquidation values instead of ongoing operations. Other principles, such as the historical cost principle, revenue recognition principle, and materiality threshold, each play important roles in accounting practices but are not classified as assumptions within the conceptual framework. Instead, they are principles or guidelines used in the application of accounting standards. The going concern assumption specifically establishes the context under which these principles are applied, highlighting its essential nature within the framework.