Gaap Principals

Question 1

Business entity rule

Answer 1

The finances of the company are kept separate from that of the shareholders

Question 2

Going concern

Answer 2

The financial statements are prepared with the understanding that the company will continue operating in the future

Question 3

Historical cost

Answer 3

All the assets are recorded at their original cost price. E.g land and building are recorded at the price that you paid for them.

Question 4

Matching

Answer 4

Income and expenses must be recorded in the correct financial year. E.g sales and cost of sales.

Question 5

Materiality

Answer 5

All important items must be shown separately in the financial statement e.g directors fees or when decisions must be made. E.g it is worth having separate accounts for wages and salaries if you have only two employees.

Question 6

Prudence

Answer 6

Figure’s used in financial statement should be realistic (conservative- always record the worst scenario). The aim of this principal is to show the reality “as it is” and not make thing’s prettier than what they are. E.g you will show ‘net debtors’ in the balance sheet (trade debtors minus provision for bad debt)