May 22, 2023

General Accounting Principles

General Accounting Principles

General Accounting Principles

Generally Accepted Accounting Principles (GAAP) refer to the standard rules, policies, procedures, and regulations used by companies in the United States to prepare and present their financial statements. GAAP provides a framework for recording, reporting and interpreting financial information in a consistent and transparent manner.

Here are some key features and components of GAAP:

1. Principles-based;

GAAP relies on a set of underlying principles rather than strict rules. This allows for flexibility and judgment in applying the principles to different reasoning situations.

2. Relevance and reliability:

The information contained in the financial statements must be reliable, accurate, weighted and verifiable.

3. Historical cost principle:

Under GAAP, most assets and liabilities are recorded at their historical cost, which is the original cost incurred to acquire them.

4. Accrual from the account;

GAAP follows accrual accounting, which means that revenues and expenses are recognized when earned or incurred, regardless of whether cash is received or paid.

5. Consistency and comparability;

GAAP aims to ensure that financial statements are prepared consistently over time and can be compared across different companies. This allows investors, creditors, and other users to make more informed decisions based on reliable and comparable data.

6. To be fully opened;

GAAP requires companies to provide all relevant information in their financial statements and accompanying notes. This includes details of accounting policies, significant valuations, and any other information necessary for users to understand the financial statements.

7. Materiality:

Companies must consider the materiality of the information it prepares for its financial statements. Materiality refers to the significance or importance of an item or event, and material information should be disclosed in the financial statements.

It is important to note that GAAP is specific to the United States. Other countries may have their own accounting standards, such as International Financial Reporting Standards (IFRS) used in many countries outside of us. However, efforts have been made to converge GAAP and IFRS in order to achieve greater global harmony in accounting standards.