Question

You recently got a job as a part-time supply chain accounting clerk to earn money while you attend school. Today, your employer, the owner of the business, made some purchases and instructed you to debit Office Supplies and credit Accounts Payable for the entire amount. He tells you that the invoice is for a few office supplies but mainly for some items that he needed for personal use at home. Discuss which GAAP is being violated, and the impact of this error on the financial statements of the business.

Answer 1

All Financial statements should be reported in line with Generally Accepted Accounting Principle (GAAP) to ensure the Financial statements give a true and fair view .
Below are the ten GAAP principles:
1.Principle of Regularity
2.Principle of Consistency
3.Principle of Sincerity
4.Principle of Permanence of methods
5.Principle of Non-Compensation
6.Principle of Prudence
7.Principle of Continuity
8.Principle of Periodicity
9.Principle of Materiality or Full Disclosure
10.Principle of Utmost Good Faith
In the given case when invoice mainly meant for personal use at home is debited to Office supplies account it does not give a true and fair view of the Financial statements. Office supplies will be overstated and personal drawings will be understated to that extent in Financial statement. This will violate Principle of Sincerity since personal expenses are debited to Office supplies account knowingly. Also Principle of Materiality will be violated
Impact of error on Financial Statements:
1.Office supplies will be inflated and consequently profit will decrease
2.Personal drawings will be understated

All Financial statements should be reported in line with Generally Accepted Accounting Principle (GAAP) to ensure the Financial statements give a true and fair view .