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Four Underlying Assumptions

Brian Krogol
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Alright. So on top of that discussion of useful information and its qualitative characteristics. Well, we're also gonna have four assumptions in financial accounting that if we didn't assume these things to be true, It would just kind of be silly. Okay, so we have four underlying assumptions. Alright, let's start here with the first one. The monetary unit assumption. Well, the currency that we're using, whether it's the dollar, the euro, the bot, whatever the currency is, we have to expect it to stay stable. Okay, so we expect the unit to stay stable. We don't really consider inflation when we, when we make our financial accounting information, we just expect a stable monetary unit. The next is the economic entity and this is that the company can be separately identified from other companies or individuals. Right? So this is the separation of the owners from the business. This is like if you were gonna, you know, I don't know, buy buy a house, you can't just buy a house and say, hey, I'm gonna put this on the business. Don't worry, I'm gonna write it off. No, we have to separate the personal lives of the owners with the business or one business from the other business. We have to have this sharp boundary between what we're calling the business and what is everything else. All right, so that's the economic entity just like here in the example, right? The personal residence of Elon musk. It's not included in Tesla's accounting records, right? Tesla is completely separate from Elon musk in that sense. So let's go on here to the next one, the periodicity assumption. And this is that the economic life of the company can be split up into periods, right? These time periods of reporting. And this basically is for the timeliness effect, right? So we're just gonna artificially draw lines and it's usually gonna be at the year mark. Right? We're gonna break up the company's time into year. We're going to say, okay, what happened this year? What happened that year? And it doesn't have to be years, Right? We can break it up by month. We can break it up by week as long as we have these consistent times. It helps with the timeliness of reporting. And generally what we see is that we're going to see quarterly reporting every three months. There's gonna be some information given to investors and that helps with the timeliness there. And the last one here is the going concern assumption. So the assumption of going concern is that the business will operate indefinitely. Right. If we didn't assume that the company is just gonna stay in business, right. If the assumption is that the business is gonna, is gonna die or if it's just gonna, uh, run out of money soon, why are we doing all this information anyways? Right. So the going concern assumption just assumes that, hey, this business is gonna keep on going. Okay. So those are four assumptions. Let's pause here and we'll discuss one more thing in the next video