Question

Why are the standards in GAAP different for loss and gain contingencies? Do you agree? Why or why not?

Answer 1

Solution. GAAP stands for generally accepted accounting principles.

It provides basic accounting standards and guidelines set by authoritative boards for consistent financial reporting.

Following are a few list of principles under GAAP:

a.It is based on the principle that only transactions that can be recorded in monetary unit should be recorded in the books of accounts of an organization.

b.Consistent accounting procedure should be maintained for following accounting years so as to facilitate comparison.

c.It is based on the principle of accrual basis of keeping records.

d.It also takes into account the assumption that the company or organization will run for an indefinite amount of time.

First,we will understand the two key terms in the statement,which are namely:

a.contingent gains-it is assumed to be an uncertain scenario resulting in gain for the business in near future.

b.contingent loss-it is assumed to turn around in form of an expense outcome for future business operation.

Now,we will see the difference of standards in GAAP for loss and gain contingencies:

1.Loss contingencies under GAAP are recorded as an estimate amount of and when any probable asset has been impaired or an liability accrues in near future business working and such an amount can be estimated beforehand, whereas, Gain contingencies are probable estimation of a revenue amount to be realised in near future.

2.Loss contingencies are definitely disclosed in the financial reporting of business organization,whereas, Gain contingencies are not disclosed in financial reporting of business organization and might be included or declared in notes following such financial reports or statements.

3.In case of loss contingencies,when the liability is realized,journal entry shall pass as:

Liability A/C Dr.

To Cash A/C

Under GAAP, they are recorded as unspecified expenses.

Whereas, gain contingencies are estimation of future revenue and expressed in the footnotes of the financial statements because recording of a revenue before realization is not allowed in GAAP because it is just a probable situation.