Generally Accepted Accounting Principles (GAAP)
Meaning and definition of GAAP
Generally Accepted Accounting Principles (GAAP) refers to a widely accepted set of rules, standards, conventions, and procedures for reporting financial info. In USA this set of rules has been established by the Financial Accounting Standards Board (FASB). GAAP is an amalgamation of authoritative standards and the usually accepted methods of recording and reporting info on accounting.
As explained by Investopedia, GAAP are enforced on the companies so as to provide the investors with least possible level of reliability in the financial statements used while analyzing companies for investment purposes. The things covered by GAAP include revenue recognition, measuring outstanding share, and classification of items on balance sheet.
Principles included in GAAP
The principles included in GAAP are derived from tradition, like the concept of matching. In any financial report, the auditor/preparer is supposed to indicate the compliance of provided info with GAAP.
1. Principle of regularity
The principle of regularity can be explained as compliance to obligatory rules and regulations.
2. Principle of sincerity
As per this principle, the accounting unit should be a reflection of a company’s financial status.
3. Principle of consistency
This principle 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 this principle is to allow the lucidity and comparison of the financial information available by the company.
5. Principle of non-compensation
This principle states that full details of the financial info should be shown without expecting any compensation of debt by an asset, revenue by an expense, and same.
6. Principle of prudence
The aim of this principle is to show the reality “as it is” and not make things prettier than what they are.
7. Principle of utmost good faith
Every informative detail related to the company should be disclosed to the insurer before he takes the policy.
8. Principle of full disclosure/materiality
It is essential to disclose all info and values pertaining to the company’s financial position.
9. Principle of periodicity
It is essential to allocate each accounting entry to a specific period and divide accordingly if numerous periods are covered.
10. Principle of continuity
It should be assumed, while stating financial info, that the business will not be interrupted.