So as in accounting, a basic notion that is the basis for accounting processes is being formed and created and these are called accounting assumptions. These accounting assumptions serve as the understructure of accounting in order to prevent misunderstanding of the use of the financial statements. Other name for accounting assumptions is postulates that are being used to enhance the understanding and usefulness of the financial statements.
There are two major underlying assumptions in accounting and these are accrual and going concern. However included in the basic assumptions of accounting are accounting entity, time period and monetary unit. One by one let us discuss the accounting underlying assumptions.
Accrual accounting is the basis for the preparation of financial statements every accounting period. So what does this accrual accounting means? This means that income is being recognized when earned regardless of when the payment is received and expense is recognized when incurred regardless of when to be paid. As you can see under this basis the effects of the transaction are being recognized when they occur and not when cash is received or paid. The importance of accrual accounting is the recognition of the following accounts: accounts receivable, accounts payable, prepaid expenses, accrued expenses, deferred income and accrued income.
What is meant by the going concern assumption is an entity is viewed as continuing in operation indefinitely even in the absence of proof to the contrary. In other words the financial statements are being prepared in the sense that the entity will continue to operate till the future. This assumption ignores market value and normally recorded asset at cost. The going concern assumption is also called the continuity assumption and is the very core of the cost principle.
Other three basic accounting underlying assumptions
This accounting entity is maybe in a form of proprietorship, partnership or corporation because in financial accounting the accounting entity is the particular business organization. In this assumption it is stated that the entity is separate from its owners, managers and employees. Meaning every transaction of the entity is separate and must not be merged with that of the owner and the other group of people just mentioned earlier.