All accounting information, whether for decision support or for accountability purposes, relies on the same foundation, the collection and processing of financial data. This process starts with five fundamental concepts; the accounting entity, going concern, accounting period, transactions and the accounting equation.
Accounting data is collected for an accounting entity – the economic unit for which financial reports will be prepared. The entity is accounted for separately from its owner or other accounting entities within the same organization. An accounting entity need not be the same as a legal entity. For example, a department within a company or a university may well be an accounting entity, but only the company or the university is the legal entity – able to enter contracts and take legal action in its own right.
Accounting entities are generally assumed to have indefinite life – that is, they will exist for the foreseeable future, unless there is clear evidence to the contrary. A few entities have specific lives – Olympic Games organizing companies and entertainment concert tour companies are examples. Some other entities may run into serious financial difficulties that threaten their continuing existence. However, most entities are assumed to be going concerns and, as we will see, their financial statements reflect this key assumption.
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