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Generally accepted accounting
principals
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Refer to the standard framework of guidelines for
financial accounting used in any given jurisdiction;generally
known as accounting standards. GAAPincludes the standards,
conventions, and rulesaccountants follow in recording and
summarizing,
and in the preparation of financial statements
GAAP
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The common set of accounting principles, standards
and procedures that companies use to compile theirfinancial
statements. GAAP are a combination ofauthoritative standards (set
by policy boards) andsimply the commonly accepted ways of recording
and
reporting accounting information.
Definition
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Accounting standards have historically been set by the
AmericanInstitute of Certified Public Accountants (AICPA) subject
toSecurities and Exchange Commission regulations.
Circa 2008, the FASB issued the FASB Accounting
StandardsCodification, which reorganized the thousands of US
GAAPpronouncements into roughly 90 accounting topics
In 2008, the Securities and Exchange Commission issued
apreliminary "roadmap" that may lead the U.S. to abandonGenerally
Accepted Accounting Principles in the future (to bedetermined in
2011), and to join more than 100 countries aroundthe world instead
in using the London-based InternationalFinancial Reporting
Standards.
History
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As of 2010, the convergence project was underway with
the FASB meeting routinely with the IASB. The SEC expressed
their aim to fully adopt International
Financial Reporting Standards in the U.S. by 2014.With
theconvergence of the U.S. GAAP and the international
IFRSaccounting systems, as the highest authority overInternational
Financial Reporting Standards, theInternational Accounting
Standards Board is becomingmore important in the U.S.
Continued
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The current set of principles that accountants use
rests upon some underlying assumptions. The basicassumptions and
principles are considered GAAP andapply to most financial
statements
Principles of Gaap
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Assets are recorded at cost, which equals the value
exchanged at the time of their acquisition. In theUnited States,
even if assets such as land or buildingsappreciate in value over
time, they are not revaluedfor financial reporting purposes
Cost principle
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Unless otherwise noted, financial statements are
prepared under the assumption that the company willremain in
business indefinitely. Therefore, assets donot need to be sold at
fire-sale values, and debt doesnot need to be paid off before
maturity. This principleresults in the classification of assets and
liabilities as
short-term (current) and long-term. Long-term assetsare expected
to be held for more than one year.Long-term liabilities are not due
for more than oneyear.
Going concern principle.
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The costs of doing business are recorded in the same
period as the revenue they help to generate. Examples ofsuch
costs include the cost of goods sold, salaries andcommissions
earned, insurance premiums, supplies used,and estimates for
potential warranty work on themerchandise sold. Consider the
wholesaler who delivered
five hundred CDs to a store in April. These CDs changefrom an
asset (inventory) to an expense (cost of goodssold) when the
revenue is recognized so that the profitfrom the sale can be
determined.
Matching principle.
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Revenue is earned and recognized upon product delivery
or service completion, without regard to the timing of cashflow.
Suppose a store orders five hundred compact discsfrom a wholesaler
in March, receives them in April, andpays for them in May. The
wholesaler recognizes the salesrevenue in April when delivery
occurs, not in March when
the deal is struck or in May when the cash is
received.Similarly, if an attorney receives a $100 retainer from
aclient, the attorney doesn't recognize the money asrevenue until
he or she actually performs $100 in servicesfor the client.
Revenue recognition principle.
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Financial statements normally provide information
about a company's past performance. However,pending lawsuits,
incomplete transactions, or otherconditions may have imminent and
significant effectson the company's financial status. The full
disclosureprinciple requires that financial statements include
disclosure of such information. Footnotessupplement financial
statements to convey thisinformation and to describe the policies
the companyuses to record and report
Full disclosure principle
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Principle of regularity:Regularity can be defined as conformity
to enforcedrules and laws.
Principle of consistency:
This principle states that when a business has oncefixed a
method for the accounting treatment of an item,it will enter all
similar items that follow in exactly thesame way.
Principle of sincerity:According to this principle, the
accounting unit shouldreflect in good faith the reality of the
company'sfinancial status.
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Principle of the permanence of methods:This principle aims at
allowing the coherence
and comparison of the financial information published by
thecompany.
Principle of non-compensation:One should show the full details
of the financial
information and not seek to compensate a debt with anasset,
revenue with an expense, etc. (see convention ofconservatism)
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
certainand a provision should be entered for an expense which
isprobable
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www.wikipedia.com
www.investopedia.com
www.bussinessdictionary.com
www.chron.com
www.ezinearticle.com
www.slidesshare.com
References
http://www.wikipedia.com/http://www.investopedia.com/http://www.bussinessdictionary.com/http://www.chron.com/http://www.ezinearticle.com/http://www.slidesshare.com/http://www.slidesshare.com/http://www.ezinearticle.com/http://www.chron.com/http://www.bussinessdictionary.com/http://www.investopedia.com/http://www.wikipedia.com/
