Generally accepted Accounting Principles (GAAP)
Who & Why use GAAP
Accountants use generally accepted accounting principles to assist them in maintaining and reporting various financial statements.
Accounting principles:
Following are generally accepted accounting principles used by accountants all over the world:
Economic Entity Assumption:
Accounting records must be separately maintained for each separate economic entity. However, accounting information from various economic entities may be combined for reporting purpose.
Moreover, business records must not include personal assets or liabilities of owners.
Monetary Unit Assumption:
An economic accounting record must only consist of quantifiable transactions reflected using stable currency like dollars.
Full Disclosure Principle:
Financial statements provide full information regarding lapsed period. However other information like pending law suits, incomplete transactions or other consideration must also be disclosed in foot notes of financial statements. This practice allows users of financial statements in reaching true state of the organization.
Time Period Assumption:
Businesses sustain for uncertain period of time. Once the time period is decided how long it would be and when it start and when it ends, accountants use this established artificial time period to record transactions and prepare financial statements.
Accrual Basis Accounting:
In most cases GAAP requires to use accrual basis accounting to record transactions and prepare financial statements. Accrual basis accounting adheres to matching, cost and revenue recognition principles. in accrual basis accounting revenue and expenses are recognized when they occur and not when cash changes hands. under cash basis accounting revenue and expenses are recognized when cash changes hands regardless of accounting period.
Revenue Recognition Principles:
Revenue is recognized on delivery of products or services without regarding the timing of cash flow.
Matching Principle:
According to this principle the cost of doing business is recording in the same accounting period in which they help to generate revenue.
Cos Principle:
According to this principle assets are recorded at cost at which they are acquired.
Going concern Principle:
According to this principle it is assumed that business will continue to operate for and indefinite period of time. This principle leads to the classification of Long and Short term Assets and Liabilities.
Relevance, Reliability and Consistency:
According to this principle financial statements are prepares using the information which is relevant, reliable and prepared in consistent manner.
Principle of Conservatism:
According to this principle accountants provide for every expenses and not to be optimistic about revenues.
Materiality Principle:
According to this principle any accounting principle may be ignored when there is no effect on the users of financial statements or data.
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