Accounting assumptions provide the foundation for the accounting process and are generally accepted without proof. The key assumptions include: continuity, which assumes a business will continue indefinitely; historical cost, which records transactions based on original cost; the entity assumption, which treats a business as separate from its owners; the monetary assumption, which uses currency to record all transactions; and the period assumption, which divides a business into arbitrary time periods for reporting.

1. RD1 Financial Reports Accounting Assumptions

2. Accounting Assumptions Accounting assumptions underlie the complete accounting process.

3. Assumptions are generally accepted or taken for granted without proof. Accounting assumptions are: Continuity – the business will continue indefinitely. When circumstances are known which make this assumption invalid, it is discarded. Historical Cost – business transactions are recorded in terms of their cost at time the transaction occurred. Provides objective verifiable evidence of a transaction rather than subjective opinion liable to distortion

4. Entity – regards the business as being an entity separate from the owners. Transactions are recorded from viewpoint of the business not the owners. Monetary – all transactions are recorded in the common monetary unit ie $. If items cannot be quantified in financial terms they are not recorded in the main records. These items can be disclosed in reports as footnotes. Period – the life of a business is divided into arbitrary time periods. For external reporting purposes the time period is generally one year but can be varied for internal purposes.