Accounting Made Simple 18 Flashcards
- What is HISTORICAL COST?
Under GAAP, assets are generally recorded at their HISTORICAL COST (the amount paid for them), even if they have increased or decreased in value.
2, Under GAAP, what is MATERIALITY?
MATERIALITY (or IMMATERIALITY) of a TRANSACTION refers to the impact that the transaction will have on the company’s Financial Statements.
- Example of MATERIALITY:
If a company owes a 75k loan but fails to include it in the Financial Statements, this is clearly MATERIAL. If it purchases $25 of office supplies and forgets to include it in the Income Statement, it is immaterial.
- Under GAAP, what is MONETARY UNIT ASSUMPTION?
GAAP assumes that the dollar is a stable measure of value, and DOES NOT take inflation under consideration.
- Under GAAP, what is ENTITY ASSUMPTION?
GAAP assumes that a company is entirely a SEPARATE ENTITY form its owners.
- What is one important ramification of the ENTITY ASSUMPTION?
If you wholly own a business, any transfers from the business bank account to your bank account NEEDS TO BE RECORDED, even if you are just moving around your own money.
- Under GAAP, what is the MATCHING PRINCIPLE?
The MATCHING PRINCIPLE dictates that EXPENSES must be matched to the REVENUES that they help generate, and they MUST BE RECORDED in the SAME PERIOD in which the REVENUES ARE RECORDED.
- The MATCHING PRINCIPLE goes hand in hand with the principle of:
ACCRUAL ACCOUNTING. The MATCHING PRINCIPLE dictates that a company’s utility expenses for March MUST be recorded in March, rather than in April, when they are likely to be paid.
- What is the reasoning behind recording March’s utility expenses in March rather than in April?
The reasoning is that March’s utility expenses contribute to the production of March’s revenues, so they must be recorded in March.
- It is the MATCHING PRINCIPLE that dictates that if a company purchases an asset that is expected to provide benefit to the company for multiple accounting periods (a desk, for instance), the cost of the asset must be:
spread out over the period for which it is expected to provide benefits. This process is known as DEPRECIATION.
