GAAP

GENERALLY ACCEPTED ACCOUNTING PRINCIPLS SUBMITTED TO TAIMOOR ABBASI SUBMITTED BY HAMEED ROLL NO 5
MBA (AFTER 14 YEARS) M 1 DEPARTMENT OF MANAGEMENT SIENCES

SIR ASMA

THE ISLAMIA UNIVERSTY BAHAWALPUR

"GAAP"
The term "GAAP" is an abbreviation for Generally Accepted Accounting Principles (GAAP). GAAP is a codification of how business 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 Financial Accounting Standards Board, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission provide guidance about acceptable accounting practices Financial statements are prepared using GAAP, most American corporations and other business entities use 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 so that financial analysis, Banks, Shareholders and the SEC can have all reporting companies preparing their financial statements using the same rules and reporting procedures. This allows for an "Apple to Apple" comparison of any corporation or business entity with another. Thus, if Company A reports $1,000,000 of net income, using GAAP, than the public and other users of financial statements can compare that net income to another company that is reporting $500,000 of net income, using GAAP

History
Auditors took the leading role in developing GAAP for business enterprises Accounting standards have historically been set by the American Institute of Certified Public Accountants (AICPA) subject to Securities and Exchange Commission regulations The AICPA first created the Committee on Accounting Procedure in 1939, and replaced that with the Accounting Principles Board in 1951. In 1973, the Accounting Principles Board was replaced by the Financial Accounting Standards Board (FASB) under the supervision of the Financial Accounting Foundation with the Financial Accounting Standards Advisory Council serving to advise and provide input on the accounting standards.

In 2008, the Securities and Exchange Commission issued a preliminary "roadmap" that may lead the U.S. to abandon Generally Accepted Accounting Principles in the future (to be determined in 2011), and to join more than 100 countries around the world instead in using the London-based International Financial Reporting Standards As of 2010, the convergence project was underway with the FASB meeting routinely with the IASB.

DEFFINATION
The common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information
GAAP is the standard framework of guidelines for financial accounting, mainly used in

the USA. It includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements.
There are accounting rules. Similar to grammar, the accounting process is based on

predetermined rules, procedures, and forms. These concepts and standards are referred to as GAAP. A common set of accounting concepts, standards, and procedures by which financial statements are prepare

Objectives
Financial reporting should provide information that is:

Useful to present to potential investors and creditors and other users in making rational investment, credit, and other financial decisions. Helpful to present to potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts. About economic resources, the claims to those resources, and the changes in them. GAAP are imposed on companies so that investors have a minimum level of consistency in the financial statements they use when analyzing companies for investment purposes. GAAP cover such things as revenue recognition, balance sheet item classification and outstanding share measurements. Companies are expected to follow GAAP rules when reporting their financial data via financial statements. If a financial statement is not prepared using GAAP principles, be very wary! That said, keep in mind that GAAP is only a set of standards. There is plenty of room within GAAP for unscrupulous accountants to distort figures. So, even when a company uses GAAP, you still need to scrutinize its financial statements.

Good Reasons to Use GAAP

Every business that expects anyone outside the company to look at its financial data should use GAAP. Compliance with GAAP helps maintain creditability with creditors and stockholders because it reassures outsiders that a company's financial reports accurately portray its financial position. Plus, anyone who reads your financial statements stockholders, creditors, security analysts or outside companies will assume that the reports comply with GAAP. Certified public accountants routinely audit companies to determine if their financial statements are prepared according to GAAP. These audit findings are typically included with companies' financial statements. There has been some discussion in recent years about changing or doing away with GAAP. Some of the criticism stems from the challenge that GAAP poses to small businesses. Still, even banks and finance companies often require their clients to use GAAP or have audited financial statements. And investors who are accustomed to using financial information prepared according to GAAP might balk if your statements don't meet their expectations.

Principles
Separate Entity principle:
According to this principle a business is separate from its owners or other businesses. The revenues or expenses of a business unit should be recorded separately from the other even the owner of the other business is same. Business records must not include the personal assets or liabilities of the owners. Revenue and expense should be kept separate from personal expenses. For example, A owns a sugar mill and a cement factory. The transactions of sugar mill will be recorded separately from the transactions of cement factory even the owner of both the units is same.

Going concern principle:

This accounting principle assumes that a company will continue to exist long enough to carry out its objectives and commitments and will not liquidate in the foreseeable future. If the company's financial situation is such that the accountant believes the company will not be able to continue on, the accountant is required to disclose this assessment.

Monetary unit principle:

According to this principle, all the events relating to a business should be measured in terms of money and a specific unit of money. The events without involving of

unit of currency are considered non monetary events and hence are not included in financial reporting.

Time period principle:

According to this principle, the business is required to measure the performance of a business at the end of a specific period of time once and for ever. He is allowed to select a time period that may be six months or one year etc, but once he selected a period then he will be needed to follow the same time period over a long period of time.

Cost principle/historical cost principle:

According to this principle, the assets/properties purchased for business should be recorded at there original purchased price. if at any time in future the price fluctuates in the market, the businessman will not have to change /adjust the price accordingly.

Matching principle:
According to this principle, the expenses of a period should be matched with the revenue of the same period. If expenses of one period are not charged to the revenue of the same period, the presented financial statements will not been Consistent and reliable. . Consider the wholesaler who delivered five hundred CDs to a store in April. These CDs change from an asset (inventory) to an expense (cost of goods sold) when the revenue is recognized so that the profit from the sale can be determined.

Realization principle:
According to this principle, revenue is considered as realized once goods have been sold or services have been rendered whether cash against the same has been collected or not. Under this basic accounting principle, a company could earn and report $20,000 of revenue in its first month of operation but receive $0 in actual cash in that month.

Accrual basis accounting principle:

In most cases, GAAP requires the use of accrual basis accounting rather than cash basis accounting. Accrual basis accounting, which adheres to the revenue recognition, matching, and cost principles, captures the financial aspects of each economic event in the accounting period in which it occurs, regardless of when the cash changes hands. Under cash basis accounting, revenues are recognized only when the company receives cash or its equivalent, and expenses are recognized only when the company pays with cash or its equivalent.

Full disclosure principle:

Financial statements normally provide information about a company's past performance. However, pending lawsuits, incomplete transactions, or other conditions may have imminent and significant effects on the company's financial status. The full disclosure principle requires that financial statements include disclosure of such information. Footnotes supplement financial statements to convey this information and to describe the policies the company uses to record and report business transactions.

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 conservatism:
If a situation arises where there are two acceptable alternatives for reporting an item, conservatism directs the accountant to choose the alternative that will result in less net income and/or less asset amount. Conservatism helps the accountant to "break a tie." It does not direct accountants to be conservative. Accountants are expected to be unbiased and objective.

Materiality principle:
This principle suggests that only the materialistic things should be recorded in books of accounts and if any sort of immaterial things are arising in business events, these should be avoided from recording in the books of accounts.

Stable dollar principle:

This accounting principle suggests that a profit earned in one year should be considered equal to the equal profit earned in some future time thereby ignoring the time value of money and purchasing power of currency .

Objectivity principle:
The company financial statements provided by the accountants should be based on objective evidence

Some other principles:

Principle of regularity: Regularity can be defined as conformity to enforced rules and laws. 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 prepays 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