The four basic assumptions of accounting are separate entity assumption, going concern assumption,

stable monetary unit assumption, and fixed time period assumption.

Accounting Entity - A corporation is considered a “living, fictional” being.

Going Concern - A corporation is assumed to remain in existence indefinitely.

Units of Measure of a company - Measurement and Financial statements show only measurable

activities. Financial statements must be reported in the national monetary unit (i.e., U.S. dollars for U.S.

companies).

Periodicity – A company’s continuous life can be divided into measured periods of time for which

financial statements are prepared. U.S. companies are required to file quarterly and annual reports.

The principles of accounting are the historical cost principle, the matching principle, the revenue

recognition principle, and the full disclosure principle

 Historical Cost - Financial statements report companies’ resources and obligations at an initial

historical cost. This conservative measure precludes constant appraisal and revaluation.

 Revenue Recognition - Revenues must be recorded when earned and measurable.

 Matching Principle - Costs of a product must be recorded during the same period as revenue

from selling it.

 Disclosure - Companies must reveal all relevant economic information determined to make a

difference to their users.

. The constraints of accounting are estimates and judgements, materiality, consistency, and conservatism.

Estimates and Judgements: Certain measurements cannot be performed completely accurately, and must

therefore utilize conservative estimates and judgments.

Materiality: Inclusion and disclosure of financial transactions in financial statements hinge on their size

and effect on the company performing them.

Consistency: For each company, the preparation of financial statements must utilize measurement

techniques and assumptions that are consistent from one period to another.

Conservatism: Financial statements should be prepared with a downward measurement bias.

GAAP are imposed on companies so that investors have a minimum level of consistency in the financial

statements they use when analyzing companies for investment purposes. GAAP cover such things as

revenue recognition, balance sheet item classification and outstanding share measurements. Companies

are expected to follow GAAP rules when reporting their financial data via financial statements.

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