Untitled Flashcards Set

GAAP Assumptions

Definition (and what they look like in accounting…)

Business Entity
Concept

• A business’ transactions are distinct from its owner or owners.

• Accountants need to ensure that only transactions affecting the business (and not the owner’s personal ones) are being recorded and analyzed.

Going Concern
Concept

• Assumes that a business will continue into the foreseeable future.

• In practice, this means that a business has to maintain accurate accounting records, even if it does poorly.
  
  

GAAP Principles

Cost Principle

• The value of an item, in a business’ records, remains at the value that was paid for it. 

• Even if it has increased or decreased since that time, we don’t change the records!

Objectivity Principle

• Accounting has to be done in such a way that two different people looking at the data will calculate the same amount. Personal feelings can’t interfere!
  
  

Principle of
Conservatism

• Accountants should make evaluations, estimates, opinions and choose accounting methods that ensure accounting records aren’t over or understated
  
  

Materiality
Principle

• Accountants must include any information that is material (or important) to users of information.

• This usually means that accountants have to include any information that would influence an owner or investor’s decisions about the company…
  
  

Consistency
Principle

• Businesses have to consistently apply the same practices they follow in accounting throughout different records.