Accounting review GAAP

The business entity concept Personal affairs of the owner must be kept separate from any other business or organization. Owner of business should not place any personal assets on the business balance sheet

The continuing concern concept ( going concern concept) Assumes that a business will continue to operate, unless it is known that it will not.

The principle of conservatism Accounting for a business should be fair and reasonable. Accountants required to make evaluations, estimates, opinions, and select procedures Should do this in a way assets or profits are neither overstated nor understated

The objectivity principle Accounting will be recorded on the basis of evidence  Evidence= different people looking at it will arrive at the same values for the transaction Ex. Source documents

The Revenue recognition convention The revenue is recorded in the accounts at the time the transaction is completed. If it is a cash transaction, revenue is recorded when the sale is completed and the cash received

Time period concept Accounting takes place over a specific time period  Fiscal periods (accounting period) y Equal lengths, y Used when measuring the financial progress of a business

The matching principle Extension of the revenue recognition convention Expense item related to revenue must be recorded in the same accounting period

The cost principle Purchases must be at the cost price to the purchaser An entirely new transaction based on new evidence will be needed to change the original value of the account (ex. Asset)

The Consistency Principle Requires a business must use the same accounting methods and procedures from period to period To change a method, must explain the change clearly on financial statements This prevents people from the sole purpose of manipulating figures on financial statements

The materiality principle Requires accountants to include in a firm s financial statement with any information that could be considered important to the users. Excluding information must not lead statement users to make different decisions from what they would make when they are given that information

The Full Disclosure Principle All information needed for a full understanding of a company s financial statements must be included