The following basic assumptions underlie the financial accounting structure:
Economic entity assumption
The economic entity assumption means that economic activity can be identified with a particular unit of accountability. The activity of a business enterprise can be kept separate and distinct from its owners and any other business unit. The entity concept does not necessarily refer to a legal entity.
Going concern assumption
Going concern assumption is that the business enterprise will have a long life. Depreciation and amortization policies are justifiable and appropriate because of the permanence to the enterprise. Only where liquidation appears imminent is the assumption inapplicable.
Monetary unit assumption
The monetary unit assumption means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis. The monetary unit is relevant, simple, universally available, understandable and useful.
The time period assumption implies that the economic activities of an enterprise can be divided into artificial time periods. It provides the trade off between relevance and reliability in preparing financial data.