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Karate King Letter to Mr. Johnnie Petro - - Case Study Example

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Further to our telephonic conversation I reviewed the accounting statements of Karate King you mailed me. I have attached the Income Statement and the Balance Sheet of the Club as per the Generally Accepted Accounting Principles (GAAP). …
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Karate King Letter to Mr. Johnnie Petro -

Download file to see previous pages... Just for your information, accounting is not a static system but a dynamic process that incorporates the generally accepted accounting principles (GAAP) that is evolved to suit the needs of the people who read the financial statements of any business. This memo provides some basic details on the principles and concepts like business entity, monetary unit, going concern, cost principle, time period, consistency, materiality, full disclosure, objectivity, revenue recognition and matching principle, which form the basis for applying the GAAP. Under this principle, from an accounting point of view the transactions of a business entity operating in any form of organisation are considered separate and distinct from that of the personal transactions. It is necessary to maintain the personal transactions separate even if the owners work in the business entity.

Monetary Unit Principle

The assumption behind this principle is that the recording of the accounting transactions would be done in the primary national monetary unit. In the case of Karate King the monetary unit used is US Dollars. It is the responsibility of the accounting function to record all the inflows of sales revenue and the expense outflows in the dollar terms.
Going Concern Principle

In general it is assumed that a business entity will remain in operation for an indefinite period. This is the principle behind the going concern concept. The continuity of business assumes that the cost of the assets engaged in the business will be recovered over their useful life by way of profits from the business.
Cost Principle

This principle is closely associated with the monetary unit principle and it requires that the value of business transactions need to be recorded at the actual or equivalent cash cost. This principle is also related to stable dollar assumption. When the economy of any country suffers from continued periods of inflation or deflation comparing the revenues and earnings for different years would be meaningless if it is assumed that the dollar will have a stable value. However it would make sense to express the value of the inventories for resale as well as some items of income and some other balance sheet items in terms of current dollar value rather than on historic dollar value.

Time Period Principle

This principle requires that the accounting transactions be recorded and analyzed for reporting the financial status and profitability of the business operations over a specific time period of operation.
Conservatism Principle

This principle requires that the balance sheet items like assets should not be overstated and the value of liabilities should not be understated.
Consistency Principle

Under consistency principle the financial statements should be prepared applying the same accounting principles from one period to another so that the statements become comparable over different periods.
Materiality Concept

The materiality concept implies that all items having value which are important and material should be reported in a correct way so that the readers of the financial statements can take proper decisions.

Full Disclosure Principle

This principle states that any future event which is likely to have a major economic impact on the financial position of the company should be disclosed fully to the potential readers of the financial statements.
Objectivity Principle

This principle implies that all the accounting tr ...Download file to see next pagesRead More
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