Generally Accepted Accounting Principles (GAAP) Lecture Notes

This set of vocabulary flashcards covers the fundamental principles of GAAP, including the ten major accounting concepts and four major accounting conventions as presented in the lecture notes.

Generally Accepted Accounting Principles (GAAP)

The common set of accounting principles, standards, and procedures used in preparing and maintaining accounting records and financial statements.

Accounting Concepts

The basic assumptions or foundations of accounting that guide accountants in recording business transactions.

Accounting Conventions

Customs, traditions, and practices followed by accountants when preparing financial statements.

Investors

Users of financial statements who seek to know if a business is profitable, focusing on dividends, earnings, and the value of shares.

Lenders

Users such as banks who use financial statements to determine if a business can pay its loans by checking profitability and solvency.

Management

Internal users who use financial statements for planning, decision-making, policy-making, and evaluating business performance.

Business Entity Concept

The principle stating that the business is separate from its owner, meaning personal transactions of the owner should not be mixed with the transactions of the business.

Going Concern Concept

The assumption that the business will continue operating for a long period of time and is not expected to close or liquidate in the near future.

Dual Aspect Concept

The statement that every business transaction has two effects (debit and credit), serving as the foundation of double-entry bookkeeping.

Accounting Equation

$Capital + Liabilities = Assets$ or $Assets = Liabilities + Capital$

Historical Cost Concept

The principle stating assets should be recorded at their original purchase cost rather than their current market value.

Money Measurement Concept

The principle stating that only transactions that can be measured in money are recorded in accounting books.

Accounting Period Concept

The practice of dividing the life of a business into specific time periods, usually 12 months, for the regular preparation of financial statements.

Realisation Concept / Revenue Recognition Concept

The rule that revenue should be recorded only when it is earned or realized, such as when goods are delivered or services are completed.

Matching Concept

The principle that revenues and their related expenses should be recorded in the same accounting period to determine correct profit or loss.

Accrual Concept

The state that income and expenses should be recorded when they are earned or incurred, rather than when cash is received or paid.

Accrued Income

Income that has already been earned but has not yet been collected.

Accrued Expense

An expense that has already been incurred but has not yet been paid.

Deferred Income

Income that has already been received but has not yet been earned.

Prepaid Expense

An expense that has already been paid but has not yet been incurred.

Concept of Objectivity

The requirement that accounting information must be based on reliable, verifiable evidence such as receipts, invoices, and vouchers.

Convention of Consistency

The principle that a business should use the same accounting methods, policies, and procedures from year to year to ensure comparability.

Convention of Full Disclosure

The requirement that all important and relevant information must be disclosed in financial statements to promote transparency.

Convention of Conservatism

The practice of recording expected losses while only recording gains when they are certain, to avoid overstating assets and revenues.

Convention of Materiality

The principle that only important and significant transactions affecting decision-making should be recorded or disclosed in detail.