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© Business Entity Concept
Accounting records be kept separate to owners records, other business etc.
© The Continuing Concern Concept
A business will continue to operate unless it is known that it will not.
© The Principle of Conservatism
All records must be fair and reasonable.
© The Objectivity Principle
Recorded on the basis of objective evidence.
Objective evidence means anyone looking at the evidence will arrive at the same answer.
© Revenue Recognition Convention
States that revenue is recorded in the accounts at the same time the transaction is completed.
© Time Period Concept
Provides that accounting take place over the fiscal periods.
© The matching Principle
An extension of revenue recognition.
Each expense item related to revenue earned must be recorded in the same accounting period as the revenue it helped to earn.
© The Cost Principle
The accounting for purchases must be at the cost price to the purchaser.
© The Consistency Principle
Business must use the same accounting methods and procedures from period to period.
© The Materiality Principle
The materiality principle requires Accountants to follow generally accepted accounting principles except when to do so would be expensive or difficult.
© The Full Disclosure Principle
States that all the information needed for a full understanding of a company's financial statements must be included.
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What authority does the Financial Accounting Standards Board have over generally accepted accounting principles?
The FASB has the authority to establish GAAPs but has no authority to enforce its standards. The SEC and the AICPA are the organizations that provide the enforcement mechanism.
Why adjustment is required at time of preparing profit and loss accounts?
Under an accrual accounting system, accountants must conform to the matching principle and the revenue recognition principle to comply with GAAPs. Therefore, adjustments of accounts that have appreciated/depreciated in value, accrued interest, expired, or otherwise changed must be performed to give an accurate picture of profitability, even when no cash is exchanged. For example, if a company purchases a $1000 insurance policy that covers 5-years, it must make a $200 adjustment at the end of the first year to account for the amount of insurance that has expired over the course of a year. It must continue making $200 adjustments every year for the next four years after that so that the profit and loss statement accurately reflects the $200 cost to the business every year.
