G.A.A.P.s

Question 1

Business Entity Concept

Answer 1

• Keeps personal and business records separate

- Keep separate records for each business

Question 2

Principle of Conservatism

Answer 2

Where there are multiple acceptable accounting treatments for an item, accountants must chose the one that will result in lower net income and net assets

Question 3

Disclosure Principle

Answer 3

Information that could affect the decisions of the users of financial statements be included when the financial statements are prepared

Question 4

Consistency Principle

Answer 4

Requires accountants to use the same methods and procedures from period to period

Question 5

Materiality Principle

Answer 5

You must follow the rules unless it will cost way too much and/or it won’t make much of a difference

Question 6

Revenue Recognition Principle (Realization)

Answer 6

Revenue is recognized as soon as it is earned (not when paid)

• Production and/or sales effort is substantially complete
• $ amount of revenue can easily be measured
• Material expenses can be determined and matched
• Collection of revenues is “reasonably assured”

Question 7

Time Period Principle

Answer 7

The period of time used in an accounting period must be clearly defined and never changed

Question 8

Matching Principle

Answer 8

Expenses must be recorded at the same time and matched with the revenue they helped generate

Question 9

Objectivity Principle

Answer 9

All data should be free from any bias and be verifiable to support the value used to record transactions

Question 10

Cost Principle

Answer 10

• Assets are recorded on the balance sheet at the price you paid for them
• These values are not changed if the market value increases over time