Summary of Qualitative Characteristics of GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
• a basic level of understandability is assumed to assist both the preparer and users of financial information
• if information has the ability to make a difference
in a decision scenario, it is relevant
Help prevent financial impact of past, present and future event.
- Feedback value
Helps confirm or correct minor expectations
• information is reliable if it can be depended upon
• when different firms use the same accounting principles
• when firms use the same account principles and methods from year to year
Economic (Business) Entity Concept
• personal transactions of owners/shareholders recorded
separately from business entity's transactions
• accounting information must be capable of third
Historical Cost (Cost Principle)
• assets and services acquired are recorded at original cost, and not subsequently changed to market/appraised value (value upwards).
Going Concern Assumption
• assumes a business will continue as a viable operations
Monetary Unit Principle
• monetary unit is stable; transaction is as recorded, not adjusted for inflation.
Time Period (Periodicity)
• life of a business entity can be broken up into distinctive periods (years, months, quarters) and report financial performance by period
• expenses are incurred to generate revenue and these expenses must be matched with the revenue earned in the same period.
Revenue Realization (Revenue Recognition) Principle
• revenue is recognized as earned when a product sold
or a service is provided
Full Disclosure Principles
• all relevant facts useful to interpreting financial statements must be disclosed (either in notes or body of statement).
• accounting practices and methods should be consistent
from year to year
• when two or more accounting alternatives are equally acceptable, the one with the least favorable impact on assets and income is chosen.
• involves professional judgment
• cost must be compared to benefits to determine desirability
of producing information
Unit of Measure
• All information is expressed in $ (or medium of exchange).