Generally Accepted Accounting Principles (GAAP)

Generally accepted accounting principles (GAAP) :

                                             GAAP refer to a common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB). GAAP is a combination of authoritative standards (set by policy boards) and the commonly accepted ways of recording and reporting accounting information. GAAP aims to improve the clarity, consistency, and comparability of the communication of financial information.

 Understanding GAAP:

                 GAAP helps govern the world of accounting according to general rules and guidelines. It attempts to standardize and regulate the definitions, assumptions, and methods used in accounting across all industries.

                The ultimate goal of GAAP is ensure a company's financial statements are complete, consistent, and comparable. This makes it easier for investors to analyze and extract useful information from the company's financial statements, including trend data over a period of time. It also facilitates the comparison of financial information across different companies.

These 10 general concepts can help you remember the main mission of GAAP:

Principle of Regularity:

                     The accountant has adhered to GAAP rules and regulations as a standard.

Principle of Consistency:

                     Accountants commit to applying the same standards throughout the reporting process, from one period to the next, to ensure financial comparability between periods. Accountants are expected to fully disclose and explain the reasons behind any changed or updated standards in the footnotes to the financial statements.

Principle of Sincerity:

                  The accountant strives to provide an accurate and impartial depiction of a company’s financial situation.

 Principle of Permanence of Methods:

                The procedures used in financial reporting should be consistent, allowing comparison of the company's financial information.

 Principle of Non-Compensation:

                 Both negatives and positives should be reported with full transparency and without the expectation of debt compensation.

Principle of Prudence:

              Emphasizing fact-based financial data representation that is not clouded by speculation.

Principle of Continuity:

             While valuing assets, it should be assumed the business will continue to operate.

 Principle of Periodicity:

                 Entries should be distributed across the appropriate periods of time. For example, revenue should be reported in its relevant accounting period.

Principle of Materiality / Good Faith:

                    Accountants must strive to fully disclose all financial data and accounting information in financial reports.

Principle of Utmost Good Faith:

                       Derived from the Latin phrase “uberrimae fidei” used within the insurance industry. It presupposes that parties remain honest in all transactions.

In this post we have learnt what is GAAP and its general concepts. Now in the next post we will learn about Accounting Concepts and convections.