CHAPTER 2

CHAPTER 2 - CHAPTER 2: I. Concepts and Principles a....

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CHAPTER 2: I. Concepts and Principles a. Historical Cost Principal i. States that all assets must be reported in the balance sheet at their original cost. Assets are things of value that you own. But, equipment for $2,000 5 years ago would be $2,000, and land purchased for $100,000 20 years ago would still be $100,000. Cost is objective and verifiable. Current market value is subjective and not verifiable. b. Periodicity – also called time period assumption i. We can divide time into accounting reporting intervals ii. Based on the calendar year 1/1/2007 – 12/31/2007 iii. Fiscal Year 3/1/2007 – 2/28/2007, business can adopt other 12-month reporting periods iv. Quarterly periods (three-month periods) 1. 1 st quarter – 1/1 – 3/31 2. 2 nd quarter 4/1 – 6/30 3. 3 rd quarter 7/1 – 9/30 4. 4 th quarter 10/1 – 12/31 c. Stable Dollar Assumption i. Ignore inflation – changes in the purchasing power of the US dollar are insignificant. ii. Utilities in 2007 - $24,000, in 2006 - $18,000 1. Inflation accounting – ignore inflation d. Economic Entity Concept i. The business unit is separate and distinct from any other business unit and from its owners. Keep the accounting records separate from any other records you’re keeping. e. Materiality i. Significance ii. Quantitative aspect – relative size or dollar amount of an item iii. Qualitative aspect – relative importance, not dollar amount. Ex: an employee strike, can’t measure dollar amount. f. Going Concern Assumption i. When we assume that a business will have an indefinite life. ii.
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CHAPTER 2 - CHAPTER 2: I. Concepts and Principles a....

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