The Four Accounting Assumptions

  1. The Accounting Entity Assumption

    The Accounting Entity Assumption assumes that the entity is separate from its owners’.   This accounting assumption states that the entity has certain rights and responsibilities.  This includes the right to pay taxes.  Also, it has to report on its financial health and to engage and adhere to its legal responsibilities.  It has also has a “birth” date like a person and a “death” date when the company is dissolved.

  2. The Going Concern Assumption

    This accounting assumption assumes that the business is going to continue indefinitely.   If it is unlikely that the business is going to continue, that is, to be a going concern and if this is not the case, then there would be need to be adjustments made to reflect the status of the business in the accounts.

  3. The Units of Measure Assumption

    This accounting assumption says that the currency that is being used in the country we are doing business that is the unit of measure that we use. For example, if we have a business in Australia, we measure everything in AUD.  It says it’s ok to ignore inflationary and deflationary changes and put everything in Australia Dollars.  This makes it simpler for users to compare different reports from the same country.  In addition they can look at differences between different divisions of the same business.

  4. The Periodicity Assumption

    The final accounting assumption says that a business’s activities can be divided easily into months, quarters and years.   Without being able to have an end point we wouldn’t know how a business is performing.  The financial year in Australia is from the 1 July to 30 June. In other countries it can be different, such as ending on the 31 March (in Japan)and the 31 December (in U.S.).  However, in Australia the financial year is from the 1st July to the 30th June.

Next: Accounting Principles