Accounting theories operate on four assumptions: the economic entity assumption, the going concern assumption, the monetary unit assumption and the periodicity assumption. The economic entity assumption states that the activities of a business are separate from the actions of the owner. The going concern assumption provides that when financial statements are prepared, the preparer assumes that the business will continue on without threat of bankruptcy or dissolution. If the business is performing poorly and there is doubt that this assumption is warranted, GAAP requires that the financial statements be prepared to reflect the company's holding on a liquidation basis -- that is, holding assets at their net realizable value. The monetary unit assumption tells users to denominate the financial statements in some sort of numerical currency relevant to the business, as opposed to units of product or some other basis. And finally, the periodicity assumption breaks the activities of a business into fiscal periods with recurring financial reporting on a monthly or annual basis.
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