Accounting Assumptions - Explained
What are the Accounting Assumptions?
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Table of ContentsWhat are Accounting Assumptions? What is the Going Concern Assumption?What is the Monetary Unit Assumption? What is the Period Assumption? What is the Business Entity Assumption?
What are Accounting Assumptions?
Just like the accounting principles, accounting also has assumptions that have to be made in order to create financial statements or to read into financial statements.
What is the Going Concern Assumption?
When we create financial statements or when we read into financial statements, we must assume that our company will go on forever.
We're not assuming that we're going to go out of business this year or the next year. This states that accounting information reflects the assumption that a business will continue operating instead of being closed or sold.
What is the Monetary Unit Assumption?
The going-concern assumption is a monetary unit assumption. This assumes that all transactions and events can be expressed in monetary units. For example, you would express the cost of a purchase in dollars, rather than units of time or amount of effort.
What is the Period Assumption?
The period assumption assumes that the life of the company can be divided into time periods, such as months and years. You can prepare useful reports for those periods. So, this assumption pretty much says that the the lifespan of my business can be divided up into months and years, rather than simply a single, never-ending continuum of reporting.
What is the Business Entity Assumption?
The business entity assumption assumes that a business is accounted for separately from its owner and other business entities. So when you're looking at a business's financial statements you're not looking at the owner's financial statements as well. You're only reading the numbers for that business.
As an investor, I don't care what the owner does with their money their own personal money. I care about what the business does with their money.
- What is Accounting? – Financial Accounting
- Who are Users of Accounting Information? – Financial Accounting
- What are Generally Accepted Accounting Principles? – Financial Accounting
- Accounting Assumptions
- Accounting Constraints
- Accounting Conservatism - Financial Accounting