GAAP Principles

Question 1

What are the different GAAP principles?

Answer 1

Entity rule, historical cost concept, Going concern concept, matching concept, prudence concept, concept of materiality. (CHEMP G)

Question 2

Explain the entity rule

Answer 2

The financial affairs of the partners should be kept separate from those of the business as they are separate entities.

Question 3

Explain the historical cost concept

Answer 3

Assets should be recorded at its historical cost, that is, the amount that was originally paid for them

Question 4

Explain the going concern concept

Answer 4

The financial statements of a business are prepared with the assumption that the business will continue operating in the foreseeable future.

Question 5

Explain the matching concept

Answer 5

Incomes and expenses must be accounted for in the correct time period (the one in which they were incurred)

Question 6

Explain the prudence concept

Answer 6

Financial results are reflected in a pessimistic/conservative manner

Question 7

Explain the concept of materiality

Answer 7

Material items must be shown in the financial statements,but the immaterial items need not be highlighted.