BAT4M - Accounting Principles from Chapters 1 & 2

Next Assessment of Learning

• Date: In class on Monday February 24th
• Topic: Some variation of the accounting cycle and financial statements

Last Class

We worked on Income Statements and Balance Sheets for R. Brown accounting. Here are the solutions. I want to stress that checking your work after you do the practice activities is an important part of self-evaluation and preparing for tests and assignments.

Accounting Concepts

• Textbook Pages: 52-56
• Canada hass followed International Financial Reporting Standards since July 2011
• Last year, you studied key concepts and principles for Canadian accountants. Four significant concepts that you should know and be able to explain in your own words are:
  1. The Business Entity Concept
  2. Going Concern Assumption
  3. Time Period Concept
  4. Monetary Unit Assumption

Accounting Principles

• Textbook: Look up each principle in the index at the back of the text.
• Generally Accepted Accounting Principles (GAAP) are the general guidelines (rules) for recording accounting transactions and the preparation of financial statements.
• Essential accounting principles that you should be able to understand and apply to case studies:
  1. Principle of Conservatism
  2. Objectivity Principle
  3. Revenue Recognition Convention
  4. Expense Recognition Convention
  5. Matching Principle
  6. Cost Principle
  7. Consistency Principle
  8. Materiality Principle
  9. Full Disclosure Principle.

Case Studies

What accounting concept or principle(s) is involved and what is the correct way to handle the situation?

1. A company purchases machinery for $10,000 but an employee thinks that it's worth more and lists the asset for $15,000 on the books. Cost Principle, Conservatism, Objectivity
2. Jacobs Ltd. buys a car but owner Brad Jacobs only uses it for his personal use. Business Entity
3. A company files its 2012 financial statements using the straight-line depreciation method but decides to switch to the declining-balance method for 2013. Consistency
4. Jennifer Jones receives $20,000 in services on February 15th on account. Jones pays the account balance March 12th so the accountant records the sales in the March income statement Revenue Recognition Principle, Time Period Concept
5. After a storm, a warehouse is flooded. It seems like about half of the merchandise has been ruined so that's what the accountant writes off the books. Objectivity, Conservatism, Cost Principle
6. The depreciation of a $50 lamp, with an estimated useful life of twenty years, is included in the income statement for every month. Materiality
7. A Canadian mining company has a gold mine in a another country that is a key source of income. However, after a change in government, that country may make foreign ownership of the mine illegal. Nevertheless, nothing is mentioned in the financial statements. Going Concern, Full Disclosure, Materiality
8. Chum Lee works at the Gold and Silver Pawn shop, where $25,000 in sales occurred in January. The sales were included in January's statements but since Chum Lee had asked Rick for an advance, his pay was added to December's salary expense account. Matching Principle, Expense Recognition
9. A company with $250,000 in assets realizes that they forgot to list a $50,000 debt repayment on the statements for the previous quarter. They decide to list it in the statements when the error is discovered. Materiality
10. An accounting firm reaches an agreement with a corporate client on February 20th to provide $200,000 in services per year for five years, starting in 2014. They record $200,000 in sales on the Income Statement for 2013. Revenue Recognition, Time Period