Module 2: Generally Accepted Accounting Principles

Question 1

What are the Generally Accepted Accounting Principles?

Answer 1

• The set of detailed accounting rules, guidelines and conventions entities adhere to in handling financial data
• Make financial state\ents meaningful, useful, comparable, relevant, objective and feasible

Question 2

What is Cost/Historical Principle?

Answer 2

• Assets and liabilities should be recorded at their original cost

Question 3

What is Conservatism Principle?

Answer 3

• Prudence principle, exercise caution in recognizing assets, liabilities, revenues, and expenses

Question 4

What is Consistency Principle?

Answer 4

• Firms should use the same accounting procedures and methods across all periods

Question 5

What is Objectivity Principle?

Answer 5

• Transactions must be supported by documentary evidence or proof

Question 6

What is Materiality Principle?

Answer 6

• Only significant information that can affect decisions should be reported

Cost Benefit Test: Costs provided in the financial statements should not exceed benefits to be considered worthwhile

Question 7

What is Matching Principle?

Answer 7

• Expenses must be matched with the revenues they generate

Question 8

What is Revenue and Expense Recognition Principle?

Answer 8

• Record revenues when they are earned, not received
• Record expenses when they are incurred, not paid
• Opposite to Cash Accounting

Question 9

What is Adequate Diclosure Principle?

Answer 9

All information that may affect user perception and evaluation of the entity must be disclosed in FS