the Internet and/or the Cyber Library

Author 's Name

Instructor 's Name

Subject Code

Date

Accounting

Part I . Terms Discussion

Generally Accepted Accounting Principles

Generally accepted accounting principles (GAAPs ) encompass conventions rules and procedures necessary to define what is accepted accounting practice . It represents the rules , procedures , practice and standards followed in the preparation and presentation of financial statemements They are like laws that must be followed in financial reporting . These principles are used by accountants and auditors alike , which guide them in properly recording , classifying and summarizing economic transactions and events

. This is to assure a business entity 's fair presentation of financial statements . The AICPA Code of Professional Conduct prohibits members from expressing an opinion or stating affirmatively that financial statements or other financial data `present fairly .in conformity with generally accepted accounting principles , if such information contain deviances from accounting principles (GAAP FASAB .Therefore , the GAAP constitute the rules to which accountants adhere in to present the financial information reliably , in all material respects , subject to the use of different users of financial statements , primarily for the purpose of decision making

Historical Cost

Inherent in asset recognition is the cost principle . This principle requires that assets should be recorded initially at original acquisition cost or historical cost . This is the acquisition cost plus incidental costs necessary to bring the asset into use and into location . In a cash transaction , cost is equivalent to the cash payment Thus , if an equipment is acquired for 5 ,000 cash , then the cost of the equipment is 5 , 000 . In a noncash or an exchange transaction , the cost is equal to the fair value of the asset given or the fair value of the asset received , whichever is clearly evident . In the absence of fair value , the cost is equal to the book value of the asset given

Accrual Basis vs . Cash Basis

In employing the Cash Basis , income is recognized cash is actually received regardless of when earned . Expenses , on the other hand , are recognized when cash is actually paid regardless of when incurred . In other words , cash receipts and cash payments are recorded during the accounting in which they occur , and these account for the revenues and expenses for the period . This approach does not recognize accrued income , deferred income , accrued expenses , and prepaid expenses However , there are some issues regarding the cash basis . It does not meet the Generally Accepted Accounting Principles (GAAP ) requirements because it does not adhere to two GAAP principles . The first is the Revenue Recognition Principle , which states that revenue should be recognized when it is realized . And the second is the Matching Principle , which states that revenue should be matched to the expense This principle implies that the generation of revenue is not without any cost or there has got to be some cost in earning an income . Accordingly the Matching Principle requires that those costs and expenses incurred in earning revenue should be reported n the same period . In other words there should be simultaneous recognition of...