Accounting is known as the language of business because it record and reveal business information. The accounting profession has developed standards and rules that universally accepted. This common set of standards is called generally accepted accounting principles (GAAP). In developing generally accepted accounting principles certain basic assumptions are made. These assumption provide a foundation for the accounting process. The main assumptions are-
Monetary Unit Assumption:
Monetary Unit Assumption is the accounting assumption that states only the transaction data that can be expressed in term of money be included in the accounting records.
To illustrate, sale of goods must be recorded in the book of account with a monetary unit, such as dollars, pounds, rupees, taka etc.
Economic Unit Assumption
Economic Unit Assumption is the accounting assumption that requires that activities of the entity be kept separate and distinct from activities of its owner and all other economic entities.
To illustrate, Mr. X owner of the ABC company, should keep his personal living costs separate from the expenses of the ABC company.
Going Concern Assumption
Going Concern Assumption is the accounting assumption that states the business runs for ever. According to this assumption, the assets and liabilities are classified into long-term and short-term basis and also expenses are classified into operational expense and capital expense.
Time Period Assumption
Time Period Assumption is the accounting assumption that states the running business will be divided into several artificial time periods. The business operation time period would be 1 month, 3 months, 6 months, 1 year. According this assumption, the enterprise prepares income statement, adjustment entry and closing entry.