Chapter 2 Balance SheetChapter 2 Balance Sheet

September 16 classSeptember 16 class

Note: Unit 1 Test (covering chapter 1, 2 and 3) will be Tuesday

September 23.

1. What is GAAP? (Generally Accepted Accounting Principle)

2. CICA (Canadian Institute of Chartered Accountants) developed a set of rules or standards called GAAP. Accountants in Canada must follow Canadian GAAP traditionally.

GAAP Defined…GAAP Defined…

1. From January 1,2011, what happened to these rules in Canada?

2. Answer: Accountants now have to use IFRS rules for public companies in Canada.

ASPE (Accounting Standards for Private Enterprises) is for non-public companies in Canada. Since these companies do not have to follow IFRS, AcSB (Accounting Standard Board) developed ASPE which is very similar to Canadian GAAP.

GAAP Defined…GAAP Defined…

The Business Entity Concept provides that the accounting for a business organization must be kept separate from the personal affairs of its owner or from any other business organization

For example, if the owner bought a computer for his home, he can not use the money of business to buy it.

The Business Entity ConceptThe Business Entity Concept

Accountants must record the value of assets at their original cost price. (not the current market value)

For example, if the business bought building in 1960 for $9000, the value of building should be recorded and kept at $9000 even in 2014 Balance Sheet. Even though the building is worth $800,000 in 2014, the book value is still at $9000 in Balance Sheet.

THE COST PRINCIPLE THE COST PRINCIPLE

The continuing concern concept assumes that a business will continue to operate unless it is known that it will not. This is also known as the going concern concept.

Because of this concept, the reader of balance sheet does not have to worry about market value of assets. This is the reason why Canadian GAAP uphold Cost Principle in most situations.

The Continuing Concern ConceptThe Continuing Concern Concept

The principle provides that accounting for a business should be fair and reasonable.

For example, if the business bought smart phone chips at $2.50 per unit. The price all of sudden went up to $3.00 last week, but this week, the price comes down to $2.60. You have to be conservative and keep the value in Balance Sheet at $2.50.

What happens if the price went down to $2.00 this week? Discuss in small groups.

Principle of ConservatismPrinciple of Conservatism

IFRS allows for modification to the cost principle. Accountants can change the value of the assets based on market condition.

For example, Let’s say Park bought land for $50,000 in 2003, but 10 years later, if the value of the land is now $250,000 then the accountant can increase the value of the land in Balance Sheet by $200,000, if the company was public company in Canada.

THE Revaluation ModelTHE Revaluation Model

What else would increase by $200,000 in Balance Sheet?

Owner’s Equity in Balance Sheet will also increase by $200,000.

Get into groups of 2 or 3 and quiz each other.

THE Revaluation ModelTHE Revaluation Model

Take up #5 P49 after 5 minutes. P37 Review #8 to #17 P47 to P49 Review Exercise #3, 4, 5 and

#7

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