Concept: business entity

A business' financial information is recorded and reported separately from the owner's personal financial information.

A person who owns a business may also own a personal house and car. However, an individual's business financial records should not include information about the individual's personal belongings. Financial records for a business and for its owner's personal belongings should not be mixed. For example, one checking account is used for the owner and another for the business. A business exists as an entity separate from its owner.

CONCEPT: Going Concern

Financial statements are prepared with the expectation that a business will remain in operation indefinitely.

Any business is started with every expectation that it will be successful. Owners expect to continue operating their businesses well into the future. For example, Jerry Fiord starts a business expecting to continue it until he retires. When he retires, Mr. Fiord expects to sell the business, and he expects the new owner to continue the business. All accounting records and statements are prepared, as though the business will continue even after the present owner is gone. The opposite eventually may prove true, but Mr. Fiord expects his business to continue indefinitely.

CONCEPT: Accounting Period Cycle

Changes in financial information are reported for a specific period of time in the form of financial statements.

Accounting records are summarized periodically and reported to business owners and managers. The reports or statements are prepared to cover a specific period of time. The period of time may cover a month, three months (quarter of a year), six months (half a year), or a year. Most individuals summarize personal financial information once a year in order to prepare tax reports.

CONCEPT: Objective Evidence

Each transaction is described by a business document that proves the transaction did occur.

A business transaction should be recorded only if it actually occurred. The amounts recorded must be accurate and true. Nearly all business transactions result in the preparation of a business paper. Checks are prepared for cash payments. Receipts are prepared for cash received. Sales slips are prepared for items sold. One way to check the accuracy of specific accounting information is to look at the business paper giving details of the transaction. Most accounting entries are supported by business forms.