In the practice of financial accounting, certain basic assumptions are important to an understanding of the manner in which data are presented. The following four basic assumptions underlie the financial accounting structure:

1. Economic Entity Assumption. 
The economic activities of an entity can be accumulated and reported in a manner that assumes the entity is separate and distinct from its owners or other business units.

2. Going Concern Assumption. 
In the absence of contrary information, a business entity is assumed to have a long life. The current relevance of the historical cost principle is dependent on the going-concern assumption.

3. Monetary Unit Assumption. 
Money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis. The monetary unit is assumed to remain relatively stable over the years in terms of purchasing power. In essence, this assumption disregards any inflation or deflation in the economy in which the entity operates.

4. Periodicity Assumption. 
The life of an economic entity can be divided into artificial time periods for the purpose of providing periodic reports on the economic activities of the entity.

As you progress through the remaining chapters in the text, the reasoning behind these assumptions should become more apparent.