Beginning assumptions  Accounting is the process of recognizing, measuring, and communicating economic information to allow informed judgments and decisions. Put more simply, accounting is the “language of business.”  There are four assumptions that accountants use, they are: 1. Economic entity- the businesses’ financial activities are separated from the business owner’s 2. Time period- Accounting information can be communicated effectively over a short period of time 3. Monetary unit- The dollar, is the best way of communicating accounting information 4. Going concern- The company that we are accounting for will continue operating. Principles in accounting There are 3 principles in accounting that must be followed:  Matching principle – Expenses should be recorded in the period, resources are used to generate income. E.g. A hospital pays $20,000 per month to 5 of its doctors. Monthly sales are $500,000. $100,000 worth of monthly salaries should be matched with $500,000 of revenue generated.  Revenue recognition principle – Revenue should be recorded when resources have been earnt. E.g. A Telecommunication Company sells talk time through scratch cards. No revenue is recognized when the scratch card is sold, but it is recognized when the subscriber makes a call and consumes the talk time.  Cost principle – assets must be recorded and maintained at the historical cost. E.g. 100 units of an item were purchased one month back for $10 per unit. The price today is $11 per unit, the inventory should appear as $1000. Financial statements Financial statements that are used by accounts to communicate information are:  Income