BUS 320 CH1 GAAP principles

Economic Entity

Record only this entity’s transactions on this company’s books; keep company’s results separate from those of the owners and the employees.

Going Concern

Assumption that the company will continue as a viable business entity.

Monetary unit

Dollar is a useful measuring unit; ignore price level changes.

Periodicity

Divide the business’ results into time periods, prepare annual Financial Statements.

Measurement Principle: Historical Cost

Record at acquisition cost, do not change for subsequent market value changes.

Measurement Principle: Fair Value

“price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. Measurement date is when the fair value valuation is made.

Revenue Recognition

Record revenue when performance obligation is satisfied. Generally the performance obligation is satisfied when the earnings process is complete. Note that collectability is no longer a criteria. Uses the asset-liability approach.

Expense Recognition

Determine revenue recognition first, then determine expense treatment.

Full Disclosure

All significant items must be disclosed, footnotes.

Materiality

A company-specific aspect of relevance. Quantitative - relative dollar significance of an item. Qualitative - intrinsic significance of the item (for example, changes a loss into a profit or conceals a fraud) If a small or immaterial amount then a less than theoretically correct treatment can be implemented.