GAAP ACCOUNTING GRADE 10 MOD 9 LESSON 1

GAAP ACCOUNTING GRADE 10 MOD 9 LESSON 1

GAAP GENERALLY ACCEPTED ACCOUNTING PRACTICE Defined as: ◦ The body of knowledge ◦ consisting of the written and unwritten rules of concepts ◦ which guide accountants in their duty of financial reporting

Need for GAAP GENERALLY ACCEPTED ACCOUNTING PRACTICE The application of GAAP ensures that Financial Statements are: Understandable Useful Relevant Reliable Timely Verifiable Neutral Comparable and consistent

ACCOUNTING CONCEPTS 1. BUSINESS ENTITY CONCEPT � Financial affairs of business and owner are kept completely separate ◦ Owner’s personal expenses/income should not form part of the books of the business. 2. HISTORICAL COST CONCEPT � Based on the rule that assets will be valued at historical cost i. e. the amount which was originally paid for them � If not the financial results could either be overstated or understated to suit their own purpose

ACCOUNTING CONCEPTS 3. GOING-CONCERN CONCEPT F/S are prepared on the assumption that a business will continue operating for the foreseeable future. If a business was to suddenly close down it would be forced to value its assets less than the values in the books. 4. MATCHING CONCEPT (2 -sided effect) Expenses & income must be recorded in the correct time period AND I & E are recorded when they are due not when they are paid or received.

ACCOUNTING CONCEPTS 5. PRUDENCE CONCEPT Based on the assumption that Financial results are presented in a conservative manner (pessimistic) Rather anticipate a loss than an income 6. CONCEPT OF MATERIALITY Covers the disclosure of items which are of importance to readers of the Fin Statements Reason is to help readers in understanding therefore only showing the relevant info