Professional Documents
Culture Documents
Overview
In this lesson, we look at the rules governing the accounting process, in particular
as determined by generally accepted accounting practice (GAAP).
Lesson
DVD The nature of GAAP
GAAP may be defined as the body of knowledge, consisting of the written and
unwritten rules of accounting, which guides accountants in their duty of financial
reporting. GAAP consists of various accounting concepts that will be further
discussed below.
The need for GAAP
The application of GAAP ensures that financial statements are:
● Understandable
● Useful
● Relevant
● Reliable
● Timely
● Verifiable
● Neutral
● Comparable and consistent.
The business entity concept
The financial affairs of a business are kept entirely separate from the financial
affairs of its owner. A business has a life distinct from that of its owner – the
owner’s personal expenses or income should not be recorded in the books of the
business, e.g. if the owner wins money in a casino, this forms part of his or her
personal income and not that of the business. Should personal income/expenses
be recorded in the books, confusion will arise and the financial statements will not
represent a true state of affairs.
The historical cost concept
This concept is based on the rule that assets will be valued at historical cost,
i.e. the amount which was originally paid for them (cost price). Land and
142 buildings which were acquired in 1990 for R90 000 will still be reflected in the
financial statements as R90 000 in the year 2000, even though the value may
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Pre-adjustment
trial balance
Journal entries
for
adjustments
Post
to the
ledger
Post-adjustment
trial balance
Activity 1
Match each concept mentioned in the left-hand column with an example of its Individual
application in the right-hand column.
formative
N.B. assessment
In your answer book, record the concepts on the left with the correct responses in
the right-hand column.
CONCEPTS APPLICATION
(A) (1)
Business entity concept Damages payable to a client will be finalised next year. An estimated
amount of R15 000 is recorded this year.
(B) (2)
Historical cost concept Interest on overdraft is shown as a separate amount in the income
statement.
(C) (3)
Going-concern concept An owner of a business wins R1 000 in a competition. This is not
reflected in the income statement of the business.
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