Generally Accepted Accounting Principles (GAAP)
GAAP stands for Generally Accepted Accounting Principles, which is an accounting principle that provides a set of rules, standards and procedures issued by the Financial Accounting Standards Board to control financial reporting and corporate accounting. The Generally Accepted Accounting Principles are mainly used by public companies in the United States.Summary
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Understanding Generally Accepted Accounting Principles
The Generally Accepted Accounting Principles refers to the concepts, set of rules, methods standards, procedure used for corporate accounting and financial reporting. GAAP ensures the consistency and transparency of the financial reports and statements of an organisation. GAAP provides the general rules and guidelines to govern accounting. It is also known as US GAAP that is developed by the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB) to apply in governmental and non-profit accounting.
GAAP used by any company to organise and summarise their financial transactions and information in the form of accounting records.
Frequently Asked Questions (FAQs)
What are the different principals of Generally Accepted Accounting Principles?
Generally Accepted Accounting Principles are generally based on 10 principles:
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According to principle of consistency, if an organisation starts to use an accounting principle or method, it must follow it in future consistently. Principle of consistency ensures that the adopted standards have to be followed consistently in financial reporting of an organisation in future accounting periods.
Principle of permanent methods is closely related to the Principle of Consistency. It states that consistent and same procedures are used in accounting and financial reporting of an organisation that allows comparison of data.
According to principle of non-compensation, an organization should not offset its debts with its assets. An organization’s performance has to report all aspects including positive and negative.
According to principle of prudence, an organisation’s reporting of financial data has to be factual, reasonable, and not speculative.
According to principle of regularity, accountants of an organisation strictly adhere to the GAAP.
According to the principal of sincerity, accountants of an organisation is performing and reporting with the honesty and accuracy.
Principle of good faith is close related with the principle of good faith, and states that any third person who is involved in financial reporting is need to in good faith and honest.
According to principal of materiality, an organisation’s financial position should be clearly disclosed in its financial reports.
According to the principal of continuity, an organisation runs and prepares its financial reports with the assumption of its business continuity in future.
According to the principle of periodicity, an organisation should present its financial reports periodically, such as quarterly or annually.
What is the significance of GAAP?
What are the key assumptions of GAAP?
Generally Accepted Accounting Principles are based on various assumptions:
What is the difference between International Financial Reporting Standards and GAAP?
The International Financial Reporting Standards (IFRS) refers to the set of rules issued by the International Accounting Standards Board (IASB) that helps to make the financial statements more consistent, transparent, and comparable. It is an alternative to the GAAP. Private companies have option how to make their financial reports by using different methods and principals and the International Financial Reporting Standards (IFRS) is mainly used by private companies. On the other hand, the Generally Accepted Accounting Principles are adopted and used by the public organizations in the United States.
The differences are: