GAAP concepts

This post is appropriate for Grades 10 to 12.

GAAP concepts

At school level we don't normally worry too much about GAAP concepts, but there are some concepts that are very important and that you are expected to know right from Grade 10.

Accrual Basis

When we prepare financial statements on the accrual basis, incomes and expenses are recorded in the period in which they occur, and not when cash is received or paid. 

This means that if we incur an expense, but do not pay for it, it is still recorded as an expense. Conversely, if we pay for an expense, but have not yet incurred it (such as when we pay an account in advance), we do not record it as an expense for this period. In the next financial period, we will then record it as an expense.

This concept is particularly important when we draw up income statements, as we will only record incomes and expenses that were earned or incurred in the period.

The "opposite" of using the accrual basis is the cash basis, which we use for Cash Budgets (Gr 10 - 12) and for Cash Flow Statements (Gr 12).

Going Concern

We assume that we are doing the books of a business that is a going concern. In other words, it is a business that will carrying on running as normal for the foreseeable future, and not one that might stop running (for whatever reason).

Historical Cost

The historical cost basis of valuing assets is that they are recorded at their original cost price.

(In practice, at school we record assets at the lower of historic cost price or net realisable market value, although you only use this very seldom. In the real world there are other ways of valuing assets too, but we limit ourselves to the historic cost at school or the net realisable market value if it's lower.)

Prudence

Prudence basically means that we are cautious or careful when we record things in the books of a business. This is not the same as being pessimistic; rather, we are just being careful. The important part of being prudent is that assets and income should not be overstated, and expenses and liabilities should not be understated.

Note that most of the information on this page is derived from the Framework for the Preparation and Presentation of Financial Statements published by the Accounting Standards Board. Note that this document itself is outside the scope of school accounting.