What Is an Accounting Postulate?
An accounting postulate is an assumption in the field of accounting based on historical practice. Accounting postulates form the basis of the accounting standards that govern how transactions are treated and recorded.
Understanding Accounting Postulates
Accounting postulates include underlying assumptions and are usually not outlined in a company's financial statements. For example, in the U.S., a postulate might outline that all numbers should be in U.S. dollars. Below are some of the most common accounting postulates in practice today.
Revenue is recorded when it's earned and not when it's received. The revenue recognition uses an accrual basis for accounting, meaning it's recorded when the sale is made regardless of when the money or cash is collected from the customer. Conversely, expenses are typically recorded when the assets are used or consumed.
Consistency in Accounting
Once an accounting method is chosen, it shouldn't be changed by the company in the future without sufficient reason. Also, all transactions should be recorded if recording or not recording them might impact an investor's decision to invest in the company.
The Company or Entity Postulate
The financial reporting of assets, liabilities, and transactions involve the company and are not mixed those of the owners or principals.
Companies will exist indefinitely, which assumes the company won't go out of business in the short-term unless something significant occurs to the contrary. The going concern postulate helps with valuing assets, which can be done at historical cost and not based on liquidation value. Companies may also be able to defer expenses to later periods, such as the depreciation of assets.
The money measurability postulate states that only items of monetary value will be reported on a company's financial statements. In other words, anything that can be quantified is not reported, such as employee morale.
The timeframe that the financial statements cover is outlined in a postulate so that comparisons can be made. For example, companies report annual results while and many other companies also report interim statements via quarterly and semi-annual financial reports. Having consistent, specific time periods is easier for investors and analysts to compare one period to another. However, valuing costs and income for a long-term asset can be difficult over multiple periods.
Although the postulates are widely accepted, disagreements can arise in specific circumstances. For example, for certain transactions, there may be disagreement on the timing for recording items of revenue and expense. Also, other accounting postulates might vary slightly depending on the industry or sector.