What are Generally Accepted Accounting Principles?
Generally Accepted Accounting Principles (GAAP) represent a set of accounting standards, rules, and principles issued by the Financial Accounting Standard Board (FASB). GAAP is one of the two prevalent accounting standards used throughout the world, the other being IFRS. While IFRS has a worldwide application, GAAP is mostly applicable in the US.
GAAP dictates how companies and other organizations prepare their financial statements. It provides rules for each aspect of accounting treatments, allowing a uniform accounting process throughout the US. For publicly-listed companies, using GAAP is mandatory. For other companies or organizations, however, it is not compulsory.
Through GAAP, companies can provide stakeholders with comparable and standardized financial reports. GAAP aims to make the financial reporting process of various companies more consistent and clearer. However, this only applies to financial reports within the US. For financial statements prepared using other standards, comparability with GAAP may not be straightforward.
Who is responsible for regulating Generally Accepted Accounting Principles?
As mentioned, the Financial Accounting Standards Board (FASB) regulates Generally Accepted Accounting Principles. Formed in 1973 as a successor to the Accounting Principles Board, the FASAB establishes and interprets GAAP standards in the US. The FASB handles GAAP standards for companies, government organizations, and nonprofits.
The Financial Accounting Standards Board works under various organizations. These include the Financial Accounting Foundation, the Financial Accounting Standards Advisory Council, the Governmental Accounting Standards Board, and the Governmental Accounting Standards Advisory Council. These organizations aim to improve financial accounting and reporting standards. Ultimately, the purpose is to provide useful information to investors and other users of the financial statements.
What are the 10 Principles of Generally Accepted Accounting Principles?
There are ten principles that define the mission of GAAP standards. These are as below.
1. Principle of Regularity
This principle states that the accountant has complied with the GAAP rules and regulations.
2. Principle of Consistency
This principle ensures that accountants use GAAP standards throughout the reporting process. GAAP is not a set of selective standards. Similarly, accountants must fully disclose and explain the reasons behind any changed or updated standards.
3. Principle of Sincerity
This principle states that accountants must provide an accurate and impartial presentation of a company’s financial situation.
4. Principle of Permanence of Methods
This principle states that accountants should use consistent procedures in their financial reporting.
5. Principle of Non-Compensation
This principle states that accountants must report all aspects of a company’s performance, whether positive or negative. They should not compensate debts with assets.
6. Principle of Prudence
This principle states that accountants should report factual financial data and not that based on speculation.
7. Principle of Continuity
This principle states that when reporting, accountants should assume the business will continue to operate in the future.
8. Principle of Periodicity
This principle states that accountants should report financial information in the relevant accounting period to which it relates.
9. Principle of Materiality
This principle states that accountants must fully disclose all financial data and accounting information in financial reports.
10. Principle of Utmost Good Faith
This principle states that all parties should remain honest in their transactions.
Conclusion
Generally Accepted Accounting Principles are a set of rules and standards for financial reporting. These are prevalent in the US and mandatory for public companies to use. GAAP comes from the Financial Accounting Standards Board. GAAP consists of 10 principles, which define how accountants and companies must report their financial information.
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