Ask Joey ™ a Question

What is the economic entity assumption?

One of the key assumptions in accounting is that the financial statements only contain the financial information of the legal entity / company that the financial statements were created for. Basically, if the financial transaction isn’t for the specific legal entity, it should not be included in the financial. For example, owner transactions or transactions of other legal entities would be excluded.


You might also be interested in...

  • What is the periodicity assumption in relation to financial reporting?

    The periodicity assumption means that a company’s economic activities can be divided into relevant reporting periods. For example, it is assumed that any company with solid financial reporting period can show the results of the business on a monthly, quarterly, or annual basis. The financial statements should contain specific reference to the date or time […]

  • What are the key accounting assumptions in financial statements?

    There are a handful of key assumptions and principles used to define accounting, which provides the structure for how a business “accounts” for the financial transactions and results of the business. 1) Economic entity: This assumption relates to the idea that all activity in the financial statements relates only to the legal entity and does […]

  • What is the monetary unit assumption in financial reporting?

    The monetary unit principle assumes that money (e.g. US dollar) is the primary unit of measurement and that all transactions and/or economic events will be measured in a form of currency.