Question

Generally Accepted Accounting Principles (GAAP), the accounting rule book. In the following scenario, please indicate which GAAP rule is being violated and why. Follow up with comments about why you think the rule exits and is important.

Scenario: XYZ Inc. was in the process of preparing its financial statements. XYZ is hoping to get approved for a loan from the First National Big Bank. XYZ's sole shareholder Slick, notices that the cash listed on the balance sheet is $4,000. Slick suggests that the balance sheet should include his personal current cash balance of $100,000. Slick convinces the company accountant to change cash on XYZ's balance sheet to $104,000. After all, he would gladly put his personal cash in if needed.

Answer 1

Answer: Business Entity Concept

Step-by-step explanation:

The Business entity concept posits that the owners of a business and the business itself, are different entities. This means that transactions involving the two are not to be mixed up but are to be recorded separately.

The reason this concept exists is to ensure that a business is analyzed and treated on its on merit and not that of its owner because the owner might be successful and the business isn't. The reverse is also true.

XYZ Inc violates this concept here by mixing the accounts of the owner and the business in order to influence a loan decision. This goes against accounting concepts and gave the company an incorrect valuation.