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FIN621 GDB Spring 2021 Solution / Discussion Last Date: 26-05-2021

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Learning outcome: After attempting this activity, students will be able to understand the concept of “Accounting Principles”.

 

Background: 

Identify the accounting principle(s) applicable to each of the following situations:

 

  1. The depreciation of a fixed asset is recorded in the financial statements, in order to follow which GAAP?
  2. In accordance with the “cost principle”, assets are required for use in the business and not for resale. This statement is in accordance with which GAAP principle?
  3. Information regarding contingent liability is provided in the footnotes of the balance sheet. This is in line with which GAAP principle?
  4. Assume that external auditor asks for receipts vouchers in order to validate accounts receivable, however, the management is unable to provide theses vouchers. Which GAAP principle is violated in such scenario?

 

anyone can share the GDB solution.

Generally Accepted Accounting Principles (GAAP)
These are ‘Ground rules’ i.e. Principles for preparing financial statements. These are constantly
evolving. These embody accounting concepts, measurement techniques and standards of presentation of
financial statements. These Accounting Principles enable comparability between various enterprises and
of the operational performance of the same enterprise over many years. These give reliability to
Financial Statements.
Following are some of the Generally Accepted Accounting Principles:
i) Entity principle/ separate entity principle: According to this principle, a business is treated as a
separate entity from the owner. The owner’s private expenditure/spending are not recorded in the books
of the business entity. For example money received as prize by a person have no effect on the books of
accounts because no business transaction is involved.
ii) Cost principle: according to this principle an asset on the balance sheet is recorded based on
its nominal or original cost when acquired by the company.
iii) Going-concern assumption: The 'going concern' concept in accounting is an assumption that the
business will continue to exist for the foreseeable future. This assumption is also closely related to cost
principle as without the 'going concern' concept, accountants would have to record all assets at current
price instead of historical cost.
iv) Objectivity principle: definite, factual basis for assets valuation; measuring transactions
objectively. An accounting principle according to which information that is supplied in a company's
financial statement must be supported by actual and real evidence and should not be based on personal
feeling or opinion.
v) Stable currency principle. The currency remains more or less stable and rate of inflation is almost
zero.
vi) Adequate disclosure concept: facts necessary for proper interpretation of statements; “subsequent
events”, lawsuits against the business, assets pledged as securities/collaterals, contingent liabilities etc;
reflected in Notes.

#FIN621 GDB 1 IDEA SOL SPRING 2021
a) The matching principle:
b) Going concern principle:
c) Full disclosure principle:
d) Reliability principle:

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