In accounting we have many principles, assumptions and concepts that help us determine the proper way to account for transactions. Let's look at a few of the basic ones.
Let's learn about four principles and conceptst that guide us in using accounting.
The economics enitity concept tells us that a business, regardless of how small, is a separate economic entity from its owners or owner.
So, the transactions for Dave's household and Dave's part time hotdog stand must be accounted for separately.
The going concern concept assumes that businesses will continue indefinitely into the future unless otherwise reported. This is reviewed annually by external auditors.
For investors and creditors they should assume that the business will continue for the foreseeable future. Hence the business is a going concern.
The cost principle requires assets to be recorded at their purchase price which we call cost. Then they will remain at that value because cost is verifiable and reliable.
Generally assets are not increased in value when their fair market value increases, because fair market value is less verifiable and reliable. Of course, there are some occassional exceptions to the cost principle.
Financial transactions must be recorded and reported in a stable accepted currency. In the U.S.amounts are recorded using dollars. The dollar is a is considered a stable unit of measure.
Throughout your study of accounting you will learn more principles, concepts, and assumptions that make up GAAP (Accounting Rules) and help guide our accounting for financial transactions.