GENERAL ACCEPTED ACCOUNTING PRINCIPLES (GAAP), CONCEPTS and ASSUMPTIONS TEST WITH 100% CORRECT ANSWERS

GENERAL ACCEPTED ACCOUNTING PRINCIPLES Are principles (including concepts and assumptions), which have gained international acceptance in the business world and accountancy profession. The accounting procedures, profit determination, preparation and presentation of financial statements must be in conformity with the generally accepted accounting principles. Business Entity Concept Under this concept, the business is treated, as having a separate personality from the owner/s Example - transactions of the business must be divorced from the transactions of the owner/s. Hence, the business as entity can acquire properties in its own name, it can sue or be sued. Going Concern Concept Under this concept, it is assumed that the business will continue its operations indefinitely unless there is evidence to the contrary. Liquidation is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations as and when they come due. Realizable value/Net realizable value is the value of an asset that can be realized upon the sale of the asset Acquisition costs also referred to as the cost of acquisition, is the cost that a company recognizes on its books for property or equipment after adjusting for discounts, incentives, closing costs and other necessary expenditures but before sales taxes. Accrual Basis of Accounting This simply means that the expenses of the business are recognized or recorded when incurred whether paid or not and revenue is recognized when earned whether collected or not Objectivity This simply means that the transactions recorded or amounts reported can be verified thru the supporting documents. To maintain the trust, faith and confidence of the users or readers on the financial statements. Should be free from bias. (MARKET PRICE CHANGES ALL THE TIME) EXAMPLES Invoice and bills Pay slips Vouchers Checks Bank Statements Historical Cost Principle This is simply means that properties or assets acquired must be recorded at the actual acquisition cost and not at an estimated cost. Market price changes all the time! Therefore... All transactions/assets of a business entity are recorded at the original cost price. Matching Costs Against Revenue This simply means that all cost and expenses incurred during the period in generating the revenue, must be matched (Subtracted) against the revenue for the same period. Consistency This simply means that for financial statements to be comparative, the application of the accounting methods, procedures, or principles must be consistent with the previous period. However, if the change will produce more accurate result, the change may be allowed provided the effect on the financial statements will be disclosed. Accounting Period Considering that the business is assumed to be going concern, its life is divided into periods (usually 1 year) at the end which financial statements are prepared. Full Disclosure This simply means that the financial statements should reflect all significant events or facts, which might influence the decisions to be made by any interested party. Accounting Equation assets = liability + owner's equity Basic Accounting Elements Basic Accounting Elements are properties or economic resources owned by the business. Examples: Cash Trading Securities Receivables Furniture and fixtures (tables, chairs, cabinets etc.) Office equipment (calculators, computers, copying machines etc.) Vehicle Inventories Liabilities these are amounts owed by the business. Debts or legal obligations of the business to individuals or other businesses. Examples: Accounts payable Loan payable Notes payable Mortgage payable Bonds payable Taxes payable Accrued expenses Capital (Owner's Equity) this is the owner's interest or claim in the assets of the business after subtracting the interest of the creditors. REVENUE is once you have delivered or done your service. PAID or NOT FULL DISCLOSURE no secrets you need to record / report all note to financial statement (FS)