Accounting Principles defined by GAAP

amyjackson January 23, 2020January 23, 2020 Accounting, Accounts, Business

GAAP is an acronym for Generally Accepted Accounting Principles. It consists of a set of standardized principles used in accounting to prepare financial statements and reports. This set of practices was developed by the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB). These principles are required to be followed to release any financial statement by all publicly traded companies according to the US law. There are ten main principles of accounting defined by GAAP. Accounting assignment writing services can help in effectively writing the principles.

1. Economic Entity Assumption:

This principle ensures that there should be separate accounts for personal use and business transactions of a firm.

2. Monetary Unit Assumption:

There are two assumptions made under this principle. One is to make sure that all financial transactions are recorded in the same currency. In the case of foreign transactions, business bookkeeping must be used.

The second is the purchasing power of currency should remain the same over time irrespective of inflation.

3. Specific Period Assumption:

According to this principle, all financial reports should show a specific period on the actual document. It is because insights and profit and loss can be drawn from these reports if the periods are mentioned.

4. Cost Principle:

It is an important principle that requires the cost of an item should be unchanged in a financial report, that is, it should be recorded at the amount for which it was bought so that the business owners should not mix cost with value.

5. Full Disclosure Principle:

A business is supposed to disclose all the information related to the function of its financial statements in notes for the reader. These notes consist of a list of business’s accounting policies, followed by any additional relevant information. This principle helps the stockholders and investors to not be misled by any financial statement.

6. Non-Death Principle:

According to this principle, the business will carry on to be existing and functioning with an indefinite period. It will have no defined end date. Under this principle, if an accountant thinks they will be forced to dissolve, then they must reveal this.

7. Matching Principle:

businesses should use the accrual method of accounting and report for all financial information. This means the expenses should be matched with revenues, and sales and the expenses used to produce those sales should also be reported in the same accounting period. The accrual-based accounting is better than cash-based accounting as it provides a better insight into the performance and profitability of a business.

8. Revenue Recognition Principle:

This principle states revenue is a reporter when it is earned. This means a business could earn monthly revenue even if there was no receiving of the actual cash that month. The income should be accurately reported even if the payment is received later.

9. Materiality Principle:

This principle focuses on the accountant’s ability to use their opinion. When the accountant is completing a business tax return and finds out that there is a small amount is off, they may judge it as immaterial.