Crash Course in Accounting and Financial Statement Analysis, Second Edition

Assumption 1: Accounting Entity

A company is considered a separate “living” enterprise, apart from its owners. In other words, a corporation is a “fictional” being:

• It has a name.

• It has a birthdate and birthplace (referred to as incorporation date and place, respectively).

• It is engaged in clearly defined activities.

• It regularly reports its financial health (through financial reports) to the general public.

• It pays taxes.

• It can file lawsuits.

Advanced Discussion: Why Assume “Accounting Entity”? Provides Context The accounting entity assumption enables users of financial reports to tell whose financials they are reviewing and therefore places those financials into context. Promotes Ownership The assumption of a company as a separate economic entity promotes ownership in the business, since its current and future owners know that their financial liability is limited to the value of their investment while they are legally shielded from any potential lawsuits brought against the company.