Assumptions of financial statements

Accountants make four assumptions in the preparation of financial statements

  1. The economic entity
    The financial statements are prepared under the economic entity assumption, meaning that the business itself is separate from the owners of the business and any other businesses.
  2. Accrual basis
    The financial statements are prepared under the accrual basis, which is a method of financial reporting that measures all cash relating to the business as it comes in and as it goes out, called ‘cash accounting’.
  3. Going concern
    The financial statements are prepared under the going concern basis, which assumes that the business will continue its operations as normal into the foreseeable future.
  4. The period assumption
    This assumption describes the time interval between financial statement reports.

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