Question

Professor’s Question: "The main goal of business is to make a profit. What do companies need to produce to make a profit in a manufacturing company? Also, when the CEO looks at financial statements dated 12/31, what balances for what date does he expect? One main reasons for adjusting entries is to follow the matching principle and to follow GAAP. What is the matching principle? What is GAAP?

Answer 1

Answer:

Companies have main goal that is profit. Each and every company (except Not for profit organizations) work for profit motive. Manufacturing companies should produce the products on large scale so that economies of scale can be achieved, when production is done in bulk, average cost comes down and profit increases.

When CEO looks the financial statement at the year end, he wants to see increase in Net profit in Income statement and decrease in liabilities and other long term obligations in Balance sheet.

Matching principle- It is very basic and important principle of accounting, this principle says that an expense should be recorded on the income statement in the same period, in which related revenue is earned. This principle is based on accrual basis accounting. There should be cause and effect relationship between the two variables in accounting.

GAAP- Generally accepted accounting principles are the common set of accounting rule, principles and standards that a company should follow in accounting and making financial statements. Generally accepted accounting principles are adopted in USA in accounting and financial statements.