Economic entity assumption

Economic entity assumption
See also

Economic entity assumption - otherwise called an accounting entity. A term used in finance, in accounting. It is the most important principle of four basic assumptions of financial accounting [1].

These assumptions restrict the amount of information and provide the groundwork for accountants in the process of creating and elaborating financial statements [2]. Through acquired information, each entity can be recognized and analyzed in terms of financial situation [3].

According to this assumption, a business and its owner are assumed to be separate entities. Also, any other business unit should be distinct. Such business transactions must always be carried out separately from those conducted by proprietors [4].

Despite the fact that from the legal point of view business entity and its proprietor are treated as a unity, in pursuance of economic entity assumption they are treated separately [5].

Each organization or unit from the public sector (e.g. government unit, municipality) or private sector (e.g. enterprise) can be classified as an economic entity. This principle is also used for companies that run more than one type of activity [6].

Assumptions of financial accounting

Amongst assumptions of financial accounting, 4 types can be distinguished[7]:

  • economic entity assumption
  • monetary unit assumption
  • going concern assumption
  • periodicity assumption

Footnotes

  1. Pratt J. 2011, p. 79-82, p. 96
  2. Goyal R., Goyal V.K. 2012, p. 21
  3. Pratt J. 2011, p. 794
  4. Kieso D.E., Weygandt J.J., Warfield T.D. 2011, p. 48-49, p. 62
  5. Tulsian P.C.,Tulsian S.D. 2005, chapter 5.2
  6. Weygandt J.J., Kimmel P.D.,Kieso D.E. 2010, p. 9-10
  7. Goyal V.K. 2007, chapter 2

References

Author: Oksana Szłapowska