September 16 GAAP Principle BAF3M

Chapter 2 Balance Sheet
September 16 class
Note: Unit 1 Test (covering chapter 1, 2
and 3) will be Tuesday September 23.
GAAP Defined…
What is GAAP? (Generally Accepted
Accounting Principle)
CICA (Canadian Institute of Chartered
Accountants) developed a set of rules or
standards called GAAP. Accountants in
Canada must follow Canadian GAAP
GAAP Defined…
From January 1,2011, what happened to
these rules in Canada?
Answer: Accountants now have to use IFRS
rules for public companies in Canada.
ASPE (Accounting Standards for Private
Enterprises) is for non-public companies in
Canada. Since these companies do not have
to follow IFRS, AcSB (Accounting Standard
Board) developed ASPE which is very
similar to Canadian GAAP.
The Business Entity Concept
The Business Entity Concept provides that the
accounting for a business organization must be
kept separate from the personal affairs of its
owner or from any other business organization
For example, if the owner bought a computer for
his home, he can not use the money of business
to buy it.
Accountants must record the value of assets
at their original cost price. (not the
current market value)
For example, if the business bought building in
1960 for $9000, the value of building should be
recorded and kept at $9000 even in 2014
Balance Sheet. Even though the building is
worth $800,000 in 2014, the book value is still
at $9000 in Balance Sheet.
The Continuing Concern Concept
The continuing concern concept assumes that
a business will continue to operate unless it is
known that it will not. This is also known as the
going concern concept.
Because of this concept, the reader of balance sheet
does not have to worry about market value of
assets. This is the reason why Canadian GAAP
uphold Cost Principle in most situations.
Principle of Conservatism
The principle provides that accounting for a
business should be fair and reasonable.
For example, if the business bought smart phone
chips at $2.50 per unit. The price all of sudden
went up to $3.00 last week, but this week, the
price comes down to $2.60. You have to be
conservative and keep the value in Balance Sheet
at $2.50.
What happens if the price went down to $2.00
this week? Discuss in small groups.
THE Revaluation Model
IFRS allows for modification to the cost principle.
Accountants can change the value of the assets
based on market condition.
For example, Let’s say Park bought land for
$50,000 in 2003, but 10 years later, if the value
of the land is now $250,000 then the accountant
can increase the value of the land in Balance
Sheet by $200,000, if the company was public
company in Canada.
THE Revaluation Model
What else would increase by $200,000 in
Balance Sheet?
Owner’s Equity in Balance Sheet will also
increase by $200,000.
Get into groups of 2 or 3 and quiz each other.
Classwork / Homework Today!
Take up #5 P49 after 5 minutes.
P37 Review #8 to #17
P47 to P49 Review Exercise #3, 4, 5 and #7