GAAP (Generally Accepted Accounting Principles)

In different countries there are different accounting principles according to their tax. GAAP (Generally Accepted Accounting Principles) are a collection of guidelines and practices used by the accounting community. In the US, GAAP standards are set by the Financial Accounting Standards Board (FASB). FASB continually updates GAAP as new accounting issues and worries occur. FASB is an organization that has been granted the authority to establish generally accepted accounting principles (GAAP) by the Securities and Exchange Commission (SEC). Financial statements submitted to the SEC by widely traded companies are required to meet GAAP standards. When comparing financial statements from different years, it is important to note any changes in GAAP occurred in between the period. Since GAAP is only a set of guidelines, it cannot guarantee financial statements are not false. If company management provides the examining firm with incorrect data, the resulting financial statements may be (GAAP compliant) yet still incorrect. For Example Every day, accountants make judgments about how to record business transactions. They often base their decisions on the financial objectives of the companies for which they work. Other times they turn to generally accepted accounting principles (GAAP) to guide their decisions. Outside the US, the equivalent of GAAP is IAS. IAS (International Accounting Standards) is maintained by the International Accounting Standards Board. Principles: Generally accepted accounting principles (GAAP) are various but based on a few basic principles that must be upheld by all GAAP rules. These principles include Comparability, Reliability, Entity Principle, Cost Principle, Going-Concern Assumptions, The Objective Principle, The StableDollar Assumption And Adequate Disclosure. Comparability: It is one of the most important GAAP categories and one of the main reasons having something similar to GAAP is necessary. By ensuring comparability, a companys financial statements and other documentation can be compared to similar businesses within its industry. The importance of this principle cannot be overstated, as without comparability investors would be unable to recognize differences between companies within an industry to standard how a company is doing compared to its peers. Reliability: There are many ways of recording transactions in an accounting system, such as writing with a pen or pencil, using a cash register etc. The primary strength of this Transaction Approach lies in the reliability of the information that is recorded. So, it should be reliable.

Entity principle: GAAP needs that a set of financial statements describe the affairs of a specific business entity. This concept is known as entity principle. In accounting, the business entity is considered as separate from the personal affairs of its owner i.e., Microsoft is a business organization operating in computer softwares. Its owner Bill Gates, may have a personal bank account, a car etc. these items are not involved in the operation of the computer softwares and should not appear in Microsoft financial statements. Cost Principle: This generally accepted accounting principle indicates that the valuation of assets (economic resources owned by an entity) in a balance sheet should be based upon historical costs, not upon current market value. OR It is widely used principle of accounting for assets at their original cost to the current owner. Going-Concern Assumptions: The balance sheet of a business is prepared on one thing understood that the business is a continuing activity, a going- concern (fear). So, the present estimated prices at which the land and buildings could be sold are of less importance than if these properties were wished-for sale. These assets can not be sold without bringing disorder disrupting the business. The Objective Principle: Accountants use the term objectives to describe assets valuations that are based on and can be verified by independent experts. For example, if (and is shown on the balance sheet at cost , any CPA (certified public accountant) who perform an audit of the business would be able to find objectives evidence that the land was actually valued at the cost of acquiring it. The StableDollar Assumption: An assumption by accountant that the dollar is a stable unit of measure, like the mile or gallon. A simplifying assumption that allows adding or subtracting dollar amount begins in different time period. Unfortunately, the assumption is incorrect and may seriously mispresent (facts etc) accounting information during periods of severe inflation. Adequate Disclosure: The accounting principle of providing with financial statements any financial facts necessary for the proper representation of those statements. It can be done in notes accompanying the statements.

References: GAAP - Generally Accepted Accounting Rules /About.com Accounting By Meigs & Meigs (Ninth Edition) GAAP and Accounting Standards an Explanation of Generally Accepted Accounting Principles (GAAP) / Suite101.com Generally Accepted Accounting Principles Wikipedia, the free encyclopedia Introduction to Accounting - Tafreeh Mela.com