Basic Accounting Assumptions

Ø  Accounting Entity

Ø  Money Measurement

Ø  Going Concern

Ø  Accounting Period

Accounting Entity

A business entity is an organization of persons to accomplish an economic goal. An entity is defined as those undertakings under the control of a single management as;

 1. Sole proprietor

       2. Partnership firm

 3. A company
 4. Non-profit making organization

We must for the book-keeping, keep the owner and his business quite separate. Only those economic affect the business unit are recorded. Assuming that business unit is a separate entity, accounting records are kept only from the point of view of the business unit and not the owners.

Example

Mr. B starts a business as X & Co., accounts are to be prepared from the point of view of X & Co., as if it was a different person from the owner.

This concept applies to all the form of business organizations for the following reasons;

 Solution to business and personal transactions of the owner.
 To ascertain the return on capital employed.
 To ensure proper use of funds.
 To hold title to property in the name of the firm.
 To enter into business with outsiders.

Money Measurement

It is the medium of exchange. It provides a uniform way to measure the value of goods services. It makes exchange more efficient. Finally, money is a store of value. Money is one form in which wealth can be maintained.

The accounting system uses money as its basic unit of measurement. All business transactions are recorded in terms of money; it is a useful way of converting accounting data into a common unit.

Under this concept, only those transactions which can be measured in terms of money are to be recorded in the books of account.

Problem with Money Measurement

Stability in the value of money

Rs.  1 a year from now will buy the same amount as it does today.

Factors of Vital Importance

Factors to the business are outside the purview of accounting.

This is because they are matters of opinion and cannot be expressed in monetary terms.

Conclusion

For the above two reasons, the money measurement concept is not ideal. It is recognized by all accountants that the concept has its limitations and inadequacies.