APPENDIX A
Basics of Accounting Theory
BASIC ASSUMPTIONS
Basic assumptions define the basic objectives of accounting practice. They provide ground rules, which are essential characteristics of a traditional accounting model.
Accounting Entity Assumption
According to this assumption, the business is considered to be separate from its individual owners. This is to ensure that the proprietor does not include any of his personal or family financial activities in the results of the business. The business transactions are identified, measured, and communicated as accounting data that is separate from the owner.
Money Measurement Assumption
This assumption states that not all activities of the business are recorded in the accounting books. Only those transactions that are measured in monetary terms are recorded. For example, wages paid can be measured in terms of money and hence it is recorded. But employee compatibility with each other cannot be measured in terms of money and is not recorded in the accounting records.
Accounting Period Assumption
The periodicity assumption refers to the qualitative characteristic of timeliness. The users require periodic information to make decisions. A natural business year is the 12-month period or 52 weeks or 365 days, where the business activities end for the year and a new accounting year begins. If the annual time period ends on December 31, it is known as calendar year. But some companies have a fiscal year that corresponds to their nature of ...
