Third is the monetary unit assumption . In the United States, we measure and report economic activities of an entity in dollars. Disregarding inflation or deflation, we assume that the purchasing power of these dollars remains stable over the years. The last is the periodicity assumption . With this, we divide an economic entity's life into artificial time periods so that we may produce periodic reports on the entity's economic activities.
Accountants follow certain basic principles in recording the transactions of a business entity.
These principles relate basically to how assets, liabilities, revenues, and expenses are identified, measured and reported. The historical cost principle states that acquisition cost is the most objective and verifiable basis upon which to account for assets and liabilities of a business enterprise. Historical cost has been found to be more definite and determinable than other suggested valuation methods. The revenue recognition principle states that revenue is recognized when the earning process is virtually complete and an exchange transaction has occurred. Generally, this takes place when a sale to another individual or entity has been confirmed.