Assumptions of financial statements
Accountants make four assumptions in the preparation of financial statements
- 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.
- 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’.
- 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.
- The period assumption
This assumption describes the time interval between financial statement reports.