• separate entity
• monetary unit
• continuity
• time period

Each economic entity needs its own financial records. A large company may have several divisions, product lines, and plants whose economic activities are combined in the company financial statements. Within that company, a specific entity, branch, office, or shop must record every economic act. Within the records, each act must be traceable to the appropriate entity. Businesses are making progress in this area. In government, it is still a subject ripe for reform.

The second assumption is monetary unit. The economic entity records only quantifiable monetary transactions. For example, hiring a coach who leads the team to a Super Bowl
results in tremendous economic benefits to the franchise, but the salary package is the only transaction on the books.

Similarly, the lost opportunity cost in the dashed expectation of the rookie quarterback cannot be written off as an expense; only the eight-figure bonus package can be deducted. The monetary transactions must be reported in a single, stable currency. International companies often report in U.S. dollars (USD), even though their activities span the globe.

Continuity is also known as the going concern assumption. The business is expected to last over time. In U.S. law, corporations are seen as individuals with an indefinite life span. Therefore, financial statements can view certain assets and liabilities as long-term, lasting more than a year.

Recall that when we post to the general journal, we always record the date. The time period assumption recognizes that business activities take place over time. Financial performance then can be reported and compared for any period of time. The economic impact of buying raw material for manufacture of a product differs from the financed purchase of the machine that makes the product. The raw material is a current asset while it is in inventory and a current expense when it turns into the product. The machine represents a long-term asset and the debt financing is a long-term liability. The time frame in which the report is prepared must take these differences into account in stating the results.

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