GAAP
Generally Accepted Accounting
Principles
• Over the years, the
CICA have
established GAAP
(Generally Accepted
Accounting
Principles)
• GAAP are the
standards and rules
for accountants in
Canada.
GAAP – The Business Entity
Concept
• The balance sheet of a business must
reflect the financial position of the
business alone.
• Personal expenditures are charged to the
owner.
GAAP - The Continuing Concern
Concept
• It is expected that the business will
continue to operate.
• If it is know that it will not continue, it must
be made known.
GAAP – The Principle of
Conservatism
• Prices should be recorded at fair amounts.
• If there is uncertainty, a best ‘conservative’
guess should be use.
eg. We will probably make $20, but
maybe someone will come along and pay
us $100!!
(Record the value at $20.)
Page 30, Exercise 1
Assets
A/R
Boat and Motor
Business Bank Balance
Business Automobiles
Furniture and Appliances
Government Bonds of Owner
House and Lot
Office Furniture and Equipment
Office Supplies
Owner's Automobiles
Paving Materials
Peronal Bank Balance
Plant Property and Buildings
Summer Cottage
Trucks and Equipment
Total Assets
Liabilities
A/P
Business Bank Loan
Mortgage on Plan Property
Mortgage on House and Lot
Mortgage on Summer Cottage
Owed to Finance Co. - Business
Equipment
Total Liabilities
Owner's Equity
Personal Net Worth
Central
Paving
Kevin
Kaghee
Business
27460
Personal
16520
1852
48054
6528
20000
99600
18324
3545
18657
55326
1528
125358
65874
28657
308576
228707
3500
56000
75000
60000
22300
136522
271022
82300
37554
146407
Case 3, Page 43
• 1. If the company were to go out of business,
and the Machinery and Equipment were worth
much less than stated, it would be hard for the
bank to still get its money.
• 2. Sales figures for the year would also help the
manager evaluate the company’s ability to repay
the loan.
• 3. The balance sheet should make sure to note
that some of the business’ activities are
stopping. (And should re-evaluate how much
should be reported on the balance sheet for
Machinery and Equipment.) (Going Concern
principle)
• 4. Changes to the balance sheet should
include the reduction of $155,000 of the
Machinery and Equipment account to the
$35,000 it is worth on the open market.
(Conservatism principle.)
5.
Custom Made Products
Balance Sheet
This Date - 20xx
Assets
Cash
A/R
Supplies
Land and Building
Machinery and Equipment
Automotive Equipment
Total Assets
1500
20540
1821
102500
85365
65385
277111
205,365
-155,000
35,000
85,365
Liabilities
Bank Loan
A/P
Mortgage Payable
Total Liabilities
105000
11850
85000
201850
Owner's Equity
H. Lahti, Capital
Total Liab. & OE
75261
277111
• 6. As indicated in the previous slides, the
GAAPs of Conservatism and Going
Concern influenced this case.
Claims against the assets:
• If a business were to go out of business,
what would happen?
• To whom do the assets belong?
– The claims of creditors are settled first.
– The owner gets what is left after the creditors
are paid.
Consider the following:
Joe Owner's Company
Balance Sheet
Dec 31, 2020
Assets
Bank
Land & Building
Total Assets
75,000
250,000
325,000
Liabilities
Bank Loan
A/P
Total Liabilities
100,000
50,000
150,000
Owner's Equity
Joe Owner, Capital
Total Liab. & OE
175,000
325,000
How much would Joe have left, if the company went out of business, and he
was able to sell the Land & Building quickly for $200,000?
Liquidated Assets: 275,000 To Creditors: 150,000 Left over: $125,000
The Changing face of the balance
sheet..
• The balance sheet can be though of as a
‘snapshot’ of a company’s finances.
• It shows what a company is worth at a
given moment in time.
• What if a company makes a profit or sells
some of its assets?
• The company’s snapshot has changed,
and this will be reflected in the balance
sheet.
Transactions
• On any given day, different events occur
that cause the financial position of a
business to change.
• These events are called Transactions.
• For example:
– A business buys a truck for $20,000.
– Its asset ‘cash’ would decrease by $20,000
– Its asset ‘trucks’ would increase by $20,000
• A business transaction is defined as a
financial event that causes a change in
financial position.
What is this?
If a business were to buy an
asset, it must have a business
paper or document to
verify the amount paid. This
record of the transaction is
called a ‘source document.’
Source Documents
• Include:
– Telephone Bills
– Store Receipts
– Debit card slips
– Cancelled Cheques
– Invoices
(Information needed by the accounting
department to record the transaction.)
Documents…
•
•
•
•
provide proof of payment
are proof of purchase
are used for reference
are filed (for at least 6 years) in case
owners, managers, or auditors wish to
refer to them.
GAAP
• The objectivity principle states that
accounting will be recorded on the basis of
objective evidence. (Receipts & Source
Documents)
Homework:
• Page 38, Review Exercises
– 1-5, 7
• Page 50, Exercises
– 1-4