ACCOUNTING GRADE 10UNIT 2:GAAP PRINCIPLES

COMPILED BY:SW MABUNDA

OUTCOMES OF THIS TOPIC

• Leaners should be able to:

Define and explain internal controlProvide reasons for internal controlExplain the GAAP principlesApply the GAAP principles

INTRODUCTION TO INTERNAL CONTROL PURPOSE

• Today’s class• Revise the importance of internal

control in a business

• Revise the concept of GAAP principles

• Revise the application of GAAP principles to ensure internal control

DEFINITION OF INTERNAL CONTROL IN A BUSINESS

• Systematic measures (such as reviews, checks and balances, methods and procedures) instituted by an organization to (1) conduct its business in an orderly and efficient manner, (2) safeguard its assets and resources, (3) deter and detect errors, fraud, and theft, (4) ensure accuracy and completeness of its accounting data, (5) produce reliable and timely financial and management information, and

(6) ensure adherence to its policies and plans.

WHY IS INTERNAL CONTROL IMPORTANT ???1.Reduce inefficiency and waste2.Prevent or detect errors and irregularities in the accounting process3.Safeguard assets from theft or unauthorized use4.Enhance the accuracy of accounting information

GAAP PRINCIPLES• Definition of GAAPGenerally accepted accounting principlesGAAP (pronounced "gap") stands for "generally accepted accounting

principles," a collection of commonly followed accounting rules and standards for financial reporting.

GAAP specifications include definitions of concepts and principles, as well as industry-specific rules. The purpose of GAAP is to ensure that financial reporting is transparent and consistent from one organization to another.

THE SIX GAAP PRINCIPLES

Historical costPrudenceMaterialityBusiness entity ruleGoing concernmatching

EXPLANATION OF EACH PRINCIPLE

1.Historical cost• Historical cost is a term used instead of the term

cost. Cost and historical cost usually mean the original cost at the time of a transaction. The term historical cost helps to distinguish an asset's original cost from its replacement cost, current cost, or inflation-adjusted cost.

• For example, land purchased in 1993 at cost of R80,000 and still owned by the buyer will be reported its cost on the buyer's balance sheet at historical cost of R80,000 even though its current cost, replacement cost, and inflation-adjusted cost is much higher today.

2.prudence

• An accounting principle that requires recording expenses and liabilities as soon as possible, but the revenues only when they are realized or assured.

EXPLANATION CONTINUES

3.Materiality

• Measure of the estimated effect that the presence or absence of an item of information may have on the accuracy or validity of a statement. Materiality is judged in terms of its inherent nature, impact (influence) value, use value, and the circumstances (context) in which it occurs.

4.Bussiness entity

• That the accounting records reflect the financial activities of a specific corporate entity, separate and distinct from the people who finance it or work in it. It is one of the 'ground rules' of accounting.

EXPLANATION CONTINUES

5.Going concern• Going concern is one the fundamental

assumptions in accounting on the basis of which financial statements are prepared. Financial statements are prepared assuming that a business entity will continue to operate in the foreseeable future without the need or intention on the part of management to liquidate the entity or to significantly curtail its operational activities. Therefore, it is assumed that the entity will realize its assets and settle its obligations in the normal course of the business.

6.matching• Accounting: A fundamental concept of accrual

basis accounting that offsets revenue against expenses on the basis of their cause-and-effect relationship. It states that, in measuring net income for an accounting period, the costs incurred in that period should be matched against the revenue generated in the same period. For example a R100 incurred this year from a tenant for next year, it will be stated in the next reporting period, but currently recognised as income received in advance.

RAOD MAP WHERE TO FROM HERE

Work through class notes together with chapter 2 of the text book(new era)

Work through theory questions from the text book

Attempt all questions in the question bank

Nothing was ever accomplished by a man standing still, half dedication do not produce half results. It produces nothing!!!!!!!!!

REFERENCE LIST• http://whatis.techtarget.com/definition/GAAP-generally-accepted-accounting-standards

• http://www.businessdictionary.com/definition/internal-control.html

• https://www.google.co.za/search?q=internal+control&rlz=1C1CHNQ_enZA571&espv=210&es_sm=93&source=lnms&tb 

• https://www.google.co.za/search?q=gaap+principles&rlz=1C1CHNQ_enZA571&espv=210&es_sm=93&source=lnms&tb 

• https://www.google.co.za/search?q=internal+control&rlz=1C1CHNQ_enZA571&espv=210&es_sm=93&source=lnms&tb 

• https://www.google.co.za/search?q=gaap+principles&rlz=1C1CHNQ_enZA571&espv=210&es_sm=93&source=lnms&tb

• https://www.google.co.za/search?q=gaap+principles&rlz=1C1CHNQ_enZA571&espv=210&es_sm=93&source=lnms&tb 

• http://www.accountingcoach.com/blog/what-is-historical-cost 

• http://accounting-simplified.com/financial-accounting/accounting-concepts-and-principles/going-concern.html 

• http://www.businessdictionary.com/definition/matching-principle.html