Question

QS 3-1: GAAP and adjusting entries : For each of the following, identify the primary GAAP that has been violated and explain why 1. Delta Company prepared its first set of financial statements for the three years ended July 31, 2020 2. Allard Consulting purchased $9,800 of supplies on September 30, 2020, and debited Office Supplies Expense. Allard's year-end is September 30. 3. On May 3, 2020, Nikos Car Wash collected $3,000 in advance from a new limousine company to begin operating June 1, 2020. Nikos credited a revenue account for the $3,000. 4. On November 20, 2020, Scooter Town rented equipment for $1,500. Scooter Town is not recording the transaction until it pays (payment is required 15 days from the rental date).

Answer 1

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

1 . GAAP violated : Accounting period principle

Reason : Delta ltd has prepared its financial statements for three years . As per ACCOUNTING PERIOD CONCEPT accounting process of a business should be completed within a period of Financial year or Calendar year . So, it has violated the accounting period principle.

2 . GAAP violated : There is no violation of GAAP

Reason : As per ACCRUAL PRINCIPLE any transactions must be accounted in the year they are earned irrespective of whether the payment is received or not .Thus , even if is made on the year end , it is debited . So there is no violation of GAAP.

3 . GAAP violated : There is no violation of GAAP.

Reason : As per ACCRUAL PRINCIPLE any transactions must be accounted in the year they are earned irrespective of whether the payment is received or not . Here , Nikos car wash has collected an advance amount of $3000 which is a DEFERRED REVENUE which has to be accounted . Since it is accounted there is no violation of GAAP.

4 . GAAP violated : Accrual principle .

Reason : As mentioned above , any transactions must be accounted when they are earned . Here , Scooter town has not recorded the ACCRUED EXPENSE which has to be accounted . so , it has violated one of the principles of  GAAP .