Intermediate Accg

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

Purpose: The primary purpose of GAAP is to make the information in financial reports relevant, reliable, and comparable.

ASSUMPTIONS:

BUSINESS (ECONOMIC) ENTITY ASSUMPITON: Requires every business to be accounted for separately and distinctly from its owners. Separate information for each business is relevant to decisions that its users make. A company’s reports should not include its owner’s personal transactions.

GOING-CONCERN ASSUMPTION: Requires financial statements to reflect the assumption that the business will continue operating instead of being closed or sold. Many decisions about a business are made with the expectation that it will continue to exist in the future.

MONETARY UNIT ASSUMPTION: Assumes that a stable currency, such as the US dollar, is used.

TIME PERIOD ASSUMPTION: An organization’s activities are identified with specific time periods. Financial statements are prepared for each reporting period. Time periods covered by the reports are called accounting periods. Most common--one year.

ACCOUNTING PRINCIPLES:

FULL-DISCLOSURE PRINCIPLE: Requires financial statements (including footnotes) to present all relevant information about the operations and financial position of the entity. Should report any facts important enough to affect a statement reader’s evaluation of the company’s operations, financial position, or cash flows. Significant information should not be withheld and enough information should be provided to make the reports understandable.

HISTORICAL COST PRINCIPLE: Requires financial statement information to be based on costs incurred in business transactions. Business transactions are exchanges of economic consideration between two parties. Cost is measured on a cash or cash equivalent basis.

MATCHING PRINCIPLE: Report expenses on the income statement in the same accounting period as the revenues that were earned as a result of the expenses. Matching of...