Tuesday, May 27, 2008

Accounting Cost Principle Information

GAAP Cost Principle = Accounting information is based on actual cost.

The value of accounts on accounting financial statements must be the actual cost incurred rather than their current market value. GAAP Cost Principle requires that accountants show amounts less than cost incurred due to the conservatism principle when unsure, yet accountants are prohibited from showing market values on the balance sheet that are greater than cost.

Accounting Example:

An airplane is an asset purchased for $1,000,000. It cannot be reported as being worth $1,200,000 on the balance sheet. It can be reported being worth $800,000.

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