INTRODUCTION
Generally Accepted Accounting Principles (GAAP) refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards.
The term "GAAP" is an abbreviation for Generally Accepted Accounting Principles (GAAP).
GAAP is a codification of how CPA firms and corporations prepare and present their business income and expense, assets and liabilities on their financial statements.
GAAP is not a single accounting rule, but rather the aggregate of many rules on how to account for various transactions.
GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing, and in the preparation of financial statements.
Some of the generally accepted principles are:
1. Matching principle: For example, if the sales occur during one period but a part of cost of goods sold is paid only during the following month or previous month, GAAP says to recognize respective costs and revenue in the same month.
2. Revenue recognition principle: For example, if $5,000 is received from a customer for a service to be performed the following month, it should not be recognized as revenue till the said service is completed.
3. Cost principle: Assets to be shown at cost price in the balance sheet, i.e., the price paid at the time of acquisition.
4. Economic entity assumption: For each economic entity financial records should be separately maintained.
Eti Priya
MBA -A
Roll No. – MB 18
DISCUSSION
The term "GAAP" is an abbreviation for Generally Accepted Accounting Principles (GAAP). GAAP is a codification of how CPA firms and corporations prepare and present their business income and expense, assets and liabilities on their financial statements. GAAP is not a single accounting rule, but rather the aggregate of many rules on how to account for various transactions. The basic principles underlying GAAP accounting are set forth below.
Most corporations and other business entities use the many rules of how to report business transactions based upon the various GAAP rules.
The rules and procedures for reporting under GAAP are complex and have developed over a long period of time. Currently there are more than 150 "pronouncements" as to how to account for different types of transactions, ranging from how to report regular income from the sale of goods, and its related inventory values, to accounting for incentive stock option distributions. By using consistent principles, all companies reporting under GAAP report these transactions on their financial statements in a consistent manner.
Financial Accounting is information that must be assembled and reported objectively. Third-parties who must rely on such information have a right to be assured that the data are free from bias and inconsistency, whether deliberate or not. For this reason, financial accounting relies on certain standards or guides that are called "Generally Accepted Accounting Principles" (GAAP).
Principles derive from tradition, such as the concept of matching. In any report of financial statements (audit, compilation, review, etc.), the preparer/auditor must indicate to the reader whether or not the information contained within the statements complies with GAAP.
§ Principle of regularity: Regularity can be defined as conformity to enforced rules and laws.
§ Principle of consistency: This principle states that when a business has once fixed a method for the accounting treatment of an item, it will enter all similar items that follow in exactly the same way.
§ Principle of sincerity: According to this principle, the accounting unit should reflect in good faith the reality of the company's financial status.
§ Principle of the permanence of methods: This principle aims at allowing the coherence and comparison of the financial information published by the company.
§ Principle of non-compensation: One should show the full details of the financial information and not seek to compensate a debt with an asset, revenue with an expense, etc.
§ Principle of prudence: This principle aims at showing the reality "as is": one should not try to make things look prettier than they are. Typically, revenue should be recorded only when it is certain and a provision should be entered for an expense which is probable.
§ Principle of continuity: When stating financial information, one should assume that the business will not be interrupted. This principle mitigates the principle of prudence: assets do not have to be accounted at their disposable value, but it is accepted that they are at their historical value.
§ Principle of periodicity: Each accounting entry should be allocated to a given period, and split accordingly if it covers several periods. If a client pre-pays a subscription (or lease, etc.), the given revenue should be split to the entire time-span and not counted for entirely on the date of the transaction.
§ Principle of Full Disclosure/Materiality: All information and values pertaining to the financial position of a business must be disclosed in the records.
§ Principle of Utmost Good Faith: All the information regarding to the firm should be disclosed to the insurer before the insurance policy is taken.
Navdeep Hans
MBA-B
Roll no- MB 81
Conclusion
Accounting principle means rule of action or conduct, or basis of conduct or practice. Generally Accepted Accounting Principles (GAAP) are the ground rules developed over long spam of year by the accounting. These are general laws or rules that are used as a guide to action in accounting. They include the convention, rules and procedures. GAAPs are the pillars on which the structure of accounting is resting. Generally Accepted Accounting Principles (GAAP) refers to the standard framework of guidelines for financial accounting. The term "GAAP" is an abbreviation for Generally Accepted Accounting Principles (GAAP). GAAP is a codification of how CPA firms and corporations prepare and present their business income and expense, assets and liabilities on their financial statements. GAAPs include the many rules of how to report business transactions based upon the various GAAP rules. This provides for consistency in the reporting of companies and businesses. The rules and procedures for reporting under GAAP are complex and have developed over a long period of time. The various rules and pronouncements come from the Financial Accounting Standards Board (FASB) promulgate the rules of GAAP report. These are some principle used in GAAPs Principle of regularity, Principle of consistency, Principle of sincerity, Principle of the permanence of methods, Principle of non-compensation, Principle of prudence.
Navdeep kaur
MBA- C
Roll No. – MB 145
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