As per AS-1 issued by ICAI there are 3 basic assumptions of accounting:

1. Going concern: The enterprise is normally viewed as a going concern, i.e. as continuing operations for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation. For example, a company purchases a plant and machinery of Rs.100000 and its life span is 10 years.According to this concept every year some amount will be shown as expenses and the balance amount as an asset.

If an enterprise is not a going concern -Valuation of its assets and liabilities on historical cost becomes irrelevant and as a consequence its profit/loss may not give reliable information.

2. Consistency:   It is assumed that accounting policies are consistent from one period to another. This adds the virtue of comparability to accounting data. It comparability is lost, the relevance of accounting data for users’ judgment and decision making is gone.

3. Accrual :  Revenues and costs are accrued, that is, recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate. This assumption is the core of accrual accounting system.The accrual concept under accounting assumes that revenue is realized at the time of sale of goods or services irrespective of the fact when the cash is received. For example, a firm sells goods for Rs 55000 on 25th March 2014 and the payment is not received until 10th April 2014, the amount is due and payable to the firm on the date of sale i.e. 25th March 2014 .It must be included in the revenue for the year ending 31st March 2014.