Accounting GAAP principles - Grade 10

Why do financial statements need to be drawn up using the same basic overall considerations?

So that financial statements of one business can be compared with those of another or with previous years'.`

What is the IASB (International Accounting Standards Board) issued?

International Financial Reporting Standard

What does the IFRS (international financial reporting standard) cover?

the presentation of financial statements

What are the principles based on?

conceptual framework and they underpin (support) the preparation of accounting records and financial statements.

What does GAAP (generally accepted accounting practice) refer to?

The way things are usually done.

What is Fair Presentation?

Financial statements have no bias. They fairly represent the performance of a business and give a true/fair view of the ACTUAL financial position.

What is Going Concern?

Financial statements are prepared on the assumption that the business will continue operating in the forseeable future.
-If management has big concerns about the business's ability to continue operating, the uncertainties MUST be disclosed.
-unless the business will stop trading.

What is Accrual Basis?

The effects of a transaction are recognized when they occur. Not when cash is received or paid.
-Transactions are recorded in the financial statements of the periods that they occur.

Consistency:

use of the same accounting principles and methods from year to year within a company.
-easy comparability

Materiality:

whether an item is large enough to likely influence the decision of an investor or creditor.
-Depreciation - congesting non-important items together with similar items.
--->> Deposit Fee, Maintenance Fee = Bank Charges

No Offsetting:

Assets and Liabilities must be recorded separately. If so, users of financial statements will not understand the transactions properly.
Debtors Control
Bad Debts
Shown separately in statement of income

Business Entity Concept:

Financial Statements prepared in POV of business. Transactions of business must be recorded separately from the owner's.
Owners personal transactions (DRAWINGS) are not recorded as business transactions.

Prudence

Caution when making judgements under conditions of uncertainty.
Assets/ Income = not overstated
Liabilities/ Expenses = not understated
-Expenses/ liabilities incurred = reported
-Income not absolutely certain = not shown

Historci cost (vs fair value)

HC = actual price paid when asset bought
FV = actual worth / intrinsic value of the asset at that time

Matching

A transaction must be accounted for in the period to which it has taken place regardless of it having been paid or received.