Assumptions of Accounting

The basic assumptions of accounting are like the foundation pillars on which the structure of accounting is based. The four basic assumptions are as follows

Accounting Entity Assumption

According to this assumption, business is treated as a unit or entity apart from its owners, creditors and others. In other words, the proprietor of a business concern is always considered to be separate and distinct from the business which he controls. All the business transactions are recorded in the books of accounts from the viewpoint of the business. Even the proprietor is treated as a creditor to the extent of his capital.

Money Measurement Assumption

In accounting, only those business transactions and events which are of financial nature are recorded. For example, when the Sales Manager is not on good terms with the Production Manager, the business is bound to suffer. This fact will not be recorded, because it cannot be measured in terms of money.

Also read: Who Uses Accounting information?

Accounting Period Assumption

The users of financial statements need periodical reports to know the operational result and the financial position of the business concern. Hence it becomes necessary to close the accounts at regular intervals. Usually, a period of 365 days or 52 weeks or 1 year is considered as the accounting period.

Going Concern Assumption

As per this assumption, the business will exist for a long period and transactions are recorded from this point of view. There is neither the intention nor the necessity to wind up the business in the foreseeable future.

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Author and Assistant Professor in Finance, Ardent fan of Arsenal FC. Always believe "The only good is knowledge and the only evil is ignorance - Socrates"
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