Generally accepted accounting principles (GAAP) can be defined as a common set of accounting principles, standards and procedures that companies must follow when they compile their financial statements. GAAP is a combination of authoritative standards (set by policy boards) and the commonly accepted ways of analyzing, recording and reporting accounting information. GAAP made communication of financial information improve and clear.
There is no universal Generally Accepted Accounting Principles (GAAP) standard and the specifics vary from one geographic location or industry to another. In the United States for example, the Securities and Exchange Commission (SEC) made it compulsory that financial reports adhere to GAAP requirements. The Financial Accounting Standards Board (FASB) stipulate GAAP overall and the Governmental Accounting Standards Board (GASB) stipulates GAAP for state and local government. Publicly traded companies must comply with both Securities and Exchange Commission (SEC) and GAAP requirements.
The words "generally accepted accounting principles" (or "GAAP") consists of three important sets of rules in accounting:
(1) The basic accounting principles and guidelines
(2) the detailed rules and standards issued by FASB and its predecessor the Accounting Principles Board (APB), and
(3) the generally accepted industry practices.
BASIC OBJECTIVES OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
Financial reporting should provide information that is:
- Useful to present to new potential investors, creditors and other users in making rational investment, credit, and other financial decisions in the organization
- Helpful to present to potential investors and creditors and other accounting users in assessing the amounts, timing, and uncertainty of prospective cash receipts about economic resources.
- Helpful for making financial decisions
- Helpful in making long-term decisions
- Helpful in improving the performance of the business
- Useful in maintaining records
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PRINCIPLES INCLUDED IN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The principles included in Generally Accepted Accounting Principles GAAP are derived from tradition, like the concept of matching. In any financial report, the auditor is supposed to point out the compliance of provided info with GAAP.
1. Principle of regularity
The principle of regularity can be explained as obedience and adherence to rules and regulations.
2. Principle of sincerity
In principle of sincerity, the accounting unit should be a reflection of a company’s financial status.
3. Principle of consistency
The principle of consistency affirms that a business should enter all similar items to be followed in exactly the same way which has once been fixed as a method.
4. Principle of permanence of method
The focus of Principle of permanence is to allow the lucidness and comparison of the financial information available by the company.
5. Principle of non-compensation
This principle of non-compensation states that full details of the financial information should be made available without expecting any compensation of debt by an asset, revenue or by an expense.
6. Principle of prudence
The aim of principle of prudence is to show the reality “as it is” and not make things prettier than what they are.
7. Principle of utmost good faith
In principle of utmost good faith states that every informative detail related to the company should be disclosed to the insurer before he takes the policy.
8. Principle of full disclosure/materiality
In this principle, It is essential to disclose all info and values pertaining to the company’s financial position.
9. Principle of periodicity
In this principle, It is essential to allocate each accounting entry to a specific period and divide accordingly if numerous periods are covered.
10. Principle of continuity
Th principle of continuity states that it should be assumed, while stating financial info, that the business will not be interrupted.