The word audit” comes form the Latin word audire which means to hear” because, in the middle Ages, accounts or revenue and expenditure were heard” by the auditor. For example in case of a proprietary concern, though the legal entity of the business and its proprietor is not same for the purpose of accounting they are be treated as separating from each other. In other words this assumption requires that for accounting purposes, a distinction should be made between (i) personal transaction and business transactions, and (ii) transactions of one business entity and transactions of another business entity. According to this assumption only those transactions which are capable of being expressed in terms of money are included in the accounting records.
Since monetary measurement of this information is not possible, this fact is not recorded in accounting records. According to this assumption the economic life of an enterprise is artificially split into periodic intervals which are known as accounting periods at the end of which an income statement and position statement are prepared to show the performance and financial position. Truly speaking measuring the income following the concept of accounting period is more an estimate than factual since actual income can be determined only on the liquidation of the enterprise. In case this assumption is not followed, the fact should be disclosed in the financial statement together with reasons.
It is assumed that the enterprise has neither the income following the concept of accounting period is more an estimate than factual since actual income can be determined only on the liquidation of the enterprise. According to accounting standard-I, if this assumption is followed, this fact need not be disclosed in the financial statement since its acceptance and use are assumed.
According to this principle, an asset is ordinarily recorded at the price paid to acquire it at the time of its acquisition and the cost becomes the basis for the accounts during the period of acquisition and subsequent accounting periods. In historical cost accounting the accounting data are verifiable, since the transactions are recorded on the basis of source documents such as voucher receipts, cash memos, invoices, etc.
According to this principle the expenses incurred in an accounting period should be matched with the revenues recognized in that period e.g. if revenue is recognised on all goods sold during a period cost of those goods sold should also be charged to that period. According to this principle the accounting data should be definite, variable and free from the personal bias of the measures.