Gaaps

Front 1

Business Entity Concept

Back 1

The accounting for a business or organization is kept separate from the personal affairs of its owner, other business or organization.

Hint 1

R. Brueht owns a construction company and believes because he is the owner, no accounting entries are needed when he removes lumber from the job-site to add a deck to his house.

Front 2

Going Concern Concept

Back 2

Assumes that a business will continue to operate unless it is known otherwise.

Hint 2

M. Elliot, after three business failures, has opened a new restaurant. When calculating the life expectancy of her new equipment, it never entered her mind that she might fail again, but only how long the equipment could be used for.

Front 3

Time Period Concept

Back 3

Accounting takes place over specific time periods known as fiscal periods. The fiscal periods should be of equal length when used to measure the financial progress of the business.

Hint 3

A company has produced financial statements for years without any date or fiscal period identified on them.

Front 4

Monetary Unit Assumption

Back 4

Accounting measures and reports the results of economic activities in terms of a stable monetary unit.

Hint 4

A used appliance store works on the cash and barter business. The bookkeeper is confused about how to record an entry, where a customer received a stove and in return owes the store 15 hours of plumbing labour.

Front 5

Principle of Conservatism

Back 5

The accounting for a business should be fair and reasonable. The results should not overstate nor understate the affairs of the business.

Hint 5

A company, after considering the resale value to properties close to theirs, tripled the value of land on their general ledger and recorded a Gain on Value of Land (a revenue account).

Front 6

Objectivity Principle

Back 6

The accounting will be recorded on objective evidence. Different people looking at the evidence will arrive at the same value for the transaction.

Hint 6

A company wrote the value of their equipment down to its estimated disposal value in order to lower net income for the year.

Front 7

Revenue Recognition Convention

Back 7

Revenue should be taken into account at the time the transaction is completed.

Hint 7

A company selling franchises charges a franchise fee lasting 20 years. They wanted to show the entire fee as revenue in the year they sold the franchise.

Front 8

Expense Recognition Convention

Back 8

Expenses are recorded when benefit is used up to generate revenue.

Hint 8

A company always recorded purchases in the Cost of Goods Sold account (expense) whether or not the merchandise had been sold.

Front 9

Matching Principle

Back 9

Each expense related to revenue earned must be recorded in the same accounting period as the revenue it helped to earn.

Hint 9

A company recorded the payment for a one year insurance policy by debiting Insurance Expense.

Front 10

Cost Principle

Back 10

Accounting for purchases must be recorded and remain at their cost price.

Hint 10

A company recorded the purchase of land at cost price and then realized the value was greatly underestimated. They wanted to change the price based on the current market value of the property.

Front 11

Consistency Principle

Back 11

Accountants should apply the same methods and procedures from period to period. When changes are made, they must be explained clearly on the financial statements.

Hint 11

A company changed their method of amortizing every two years.

Front 12

Materiality Principle

Back 12

Accountants are required to use GAAPs except when to do so would be expensive or difficult and where it makes no real difference to the decisions of users of financial statements.

Hint 12

A company debited $15 to Office Equipment for the purchase of a new pencil sharpener which will be used by the business for the next 5 years.

Front 13

Full Disclosure Principle

Back 13

Any and all information that affects the full understanding of a company's financial statements must be included with the financial statements.

Hint 13

A company prepared an unclassified set of financial statements.