 My name is Sue Schmidt and I am your instructor today. My background, I am a certified public accountant, so I am a technically trained CPA. However, most of my experience has been within a Fortune 500 company, a manufacturing company specifically, where I was a controller at many different levels of the organization. In addition, I've held roles as a manager of internal controls, so I have a lot of expertise there. And I taught college for five years, so I love teaching and I'm happy to be here. So, if you recall, generally accepted accounting principles is that standard set of rules that we use in accounting that pretty much dictate everything that we do in accounting. It's the theory behind why we do transactions the way we do and our different activities, including reporting. It also guides us on how we do our reporting and we'll talk more about that full disclosure principle that I've mentioned before, which is really about reporting. So, we all follow GAP and we have to learn about GAP first, obviously. And we do it because it ensures that all of our accounting information is accurate, that it is consistent, consistent within the same company from month to month and year to year, but also consistent between two different companies. Because how can you determine which company you want to invest in if they're using different accounting practices? You won't be able to judge them appropriately. So, everyone has to use the same set of rules. In addition, it also ensures that all of our accounting information and transactions are free from bias, which means I'm not going to use much of my own personal judgment. I'm going to use generally accepted accounting principles to ensure that I know exactly how something should be recorded. So, there are 11 generally accepted accounting principles. These three we've already learned about, but let's do a quick review. The business entity principle or concept says that an owner and the business must be kept separate, right? The bank account of the owner cannot be commingled and cannot be the same bank account as the business. The two are separate, which means when the owner contributes cash or other assets to the business, it's actually a transaction or a donation from the owner into the business. And vice versa, when the owner withdraws cash or other assets from the business, now it belongs to the owner and is kept separate from the bookkeeping of the business. The second principle is the objectivity principle. This one states that every transaction must be supported by objective evidence. Now, what is objective evidence? It is some type of formal documentation that supports the amount, the date, the quantity of the transaction, things like invoices. When I buy a good, it is supported by the invoice that I, in fact, you know, received and the receipt that I got when I bought the goods. That is good supporting evidence for a transaction. For an employee to be paid, they must have some type of employee timekeeping, such as a time card or a time clock. That also is very good evidence for recording payroll. And lastly, how do I know when to record revenue? Well, maybe if I ship goods, I have shipping documentation that shows evidence of exactly what I shipped and on the date and time that I shipped it. So that supports why I billed it on that day and why I recorded that revenue. So that's the objectivity principle. The time period concept says that the life of a business can be broken down into equal time periods. And it's key that they basically are equal. So the most important time period is one year because every business is judged based on a yearly basis. If you're a public company, you are also judged and you produce financial statements on a quarterly basis. So every public company must in fact disclose financial information and financial reports to the public on a quarterly basis. Now, whether or not you produce financial reports on a monthly basis is up to your business. Most businesses do close the books monthly because they need to keep a gauge on how the business is doing, all right? But you don't have to do something on a monthly basis. But again, that is another common time period. The next principle we discussed was the revenue recognition principle. And what it states is that regardless of when my customers pay me, I record revenue when I've earned it. Which means I have either performed a service and so I've earned it. Or I have, well, such in the case of a bookkeeper, you perform a service and you earn revenue in that regard, right? Perhaps I have shipped goods to someone or maybe they came into my store and they bought goods from me, clothing, groceries, whatever it is. At that moment, you have earned that revenue regardless of whether or not the customer has paid you. And I think we also learned, I know we also learned that in the last course, when someone doesn't pay you, you record something called an accounts receivable, right? And when you don't automatically pay somebody on the day that you buy goods, you record something called accounts payable. And we often give each other 30 days, sometimes 60 days to pay. That's a very common thing within business. So I don't care when we pay, I'm going to record revenue when it's earned. The next principle is the matching principle. And if you recall our Starbucks example where we opened up a Starbucks, it was important to properly match expenses with the revenues in which we had incurred the expenses in earning that revenue. So in terms of Starbucks, when I sell coffee, the expenses related to that sale are part of the cost of the barista. It's the coffee, it's the cup that I put it in, it's the salaries that I'm paying to the individual. It is the utility expense for that month, right? So all those things that are incurred at that time of that sale must be properly matched during that perspective time period. Okay, got to match the two. Otherwise, information doesn't make any sense. The next principle is the cost principle. This says that when we record purchases or anything else for that matter, we do it at cost. Because it is the most reliable valuation that we have. And what do I mean by that? So let's say we're going to go buy a car. Well, we all have different perspectives on what that car is worth. So let's say we buy a car and I say, well, I think that car is worth easily $18,000. And somebody else says, well, I think that car is worth $21,000. Well, the only way to really figure out what that car is worth, the only thing that is truly objective is what did I pay for it? What was the cost? Okay? So everything gets recorded at cost. The last principle here is the consistency principle, which states that we do the same thing month after month, quarter after quarter, and year after year. We have choices in accounting practices. Actually, there's times when you have to choose, am I going to do it this way or am I going to do it this way? And the key here is that you do it consistently from month to month, quarter to quarter, year to year. You can change a principle. You can change your practice periodically, but you're going to have to disclose it to everyone and say, FYI, I changed this and this is the impact that it had on my financial statements. However, in general, we try and keep things consistent because different practices will give us different financial results. So it's important people understand that. All right, so let's talk about some of the new principles, shall we? The materiality principle. Materiality is a little subjective, right? It's how do you know something's material versus immaterial? And a lot of that comes over time and experience. But in general, we consider something material. If a reasonable investor or creditor, if recording it one way or another would influence their decision on whether or not they want to invest in our company or they want to loan us money. So here's the key. If a transaction is material, you must follow generally accepted accounting principles because that's the rules. We have to follow it because otherwise we can influence people's decisions. If, however, a transaction is insignificant, it's not material to the books, it doesn't matter. It really doesn't. So when I was once an auditor, when we would audit, we would always find things that weren't done in accordance with GAAP and that was okay. We did, we had a list. We would put it up on this sheet with the dollar value impact, right? And we would track all the different things that we found. If the list became material to the company, if we thought when you aggregated it and you summed it all up that it would have an influence on someone's opinion of the company, whether investor or creditor, then book them properly in accordance with GAAP. If, however, they were so insignificant it didn't matter, it didn't matter. So that's the materiality principle. Full disclosure. So I just mentioned one thing that we have to disclose and that is if we change our accounting practices. The other thing that we have to disclose, and we do this in what's called a footnote to the financial statements, we disclose what our decisions were around our accounting practices. We disclose whether or not we think that we may have a potential liability. Maybe we have a lawsuit going on and we need people to understand that oh, we're being sued and we'll even go so far as to say our lawyers say we're not going to lose. So it's all good. We may actually say that, hmm, our lawyers are telling us we might lose and if we lose the range of money that we could owe is between this amount and this amount. Or we may disclose that we have been found guilty and we are going to be accruing this amount of money that we have to pay. So we disclose environmental issues that might be out there. Let's say someone has found some toxic waste and they're saying it's our fault. They're going to have to disclose that. There are many different types of disclosures. The key is we make the public aware of what's going on with our company because we want to make sure that we are not, you know, influencing their opinion of our company improperly. They need to know all the information about us. So next is the continuing concern concept. This is a pretty simple concept. It means that our business is going to go on and on and on forever without interruption. And we always assume that. And the reason why is if we didn't assume that, we would probably have different accounting practices. If I knew that a car, okay, the car that I own that I recorded at cost, if I knew I was closing my doors next month, it's not worth cost anymore. It's worth whatever I could sell it for on the open market today. So it would be worth market value. So if I don't think a company is going to continue on, values change of what I have recorded in the books. It's no longer at cost. So our assumption is always things stay at cost and we go on and on and on forever. The last principle is called the conservatism principle. When in doubt, a bookkeeper or an accountant should use this method in recording a transaction. And it means that we're going to take the most conservative approach. Our most conservative value of our assets and how we influence income. I never want to potentially overstate my income. Okay, because again, that's going to influence someone's opinion of my company. And they're going to make a decision based on that. And if I overstated my income, that could have a very negative result. If I understate my income, well, that's not good either, but at least I've got, you know, I've influenced them in a good direction, in a conservative direction, but that's not good either. So what I want to be clear here is we want to state things properly. Not understated, not overstated, but I do err on the side of conservatism. Thank you.