Generally Accepted Accounting Principles-GAAP: GAAP is an Americanized term for the accounting standards and procedures that need to be followed by companies while compiling their financial statements. It includes the standard conventions and rules that need to be followed in maintaining financial transactions. GAAP ensures that the financial data is free from inconsistency and bias, and thus ensure that the financial statements provide a true and fair view of the actual transactions that have occurred in the business. GAAP classifies balance sheet items, puts down rules for revenue recognition etc.
Advantages of GAAP
Helps maintain creditability with stakeholders and creditors
Ensures that the financial reports show the true financial position of the company
The Generally accepted accounting principles are varied across nations. However, they are based on basic principles which are given below-
Principle of relevance - This principle ensures that all the information presented in financial statements should be relevant in assisting a person evaluate the statements.
Principle of regularity - The principle of regularity ensures that the statements are in conformance with the enforced rules and laws.
Principle of sincerity - The principle of sincerity ensures that the accounts department of the company should show the reality of the company's financial status in an appropriate manner.
Principle of consistency: The principle of consistency ensures that a company follows the same rules and principles for all items in accounting. This will help ensure consistency across all the items of accounting in an organization.
Principle of non-compensation: This principle states that the company should show complete details of its financial performance and should not change debt for an asset or revenue with expense.
Principle of continuity: The principle of continuity states that while making financial records and statements, one must assume that the business shall continue without any interruption.
Principle of periodicity: According to the principle of periodicity, each entry in the financial statements should represent a given period and it should be made according to that given period. For e.g. If a customer pays money in installment i.e. they pay on monthly basis. In this case the amount collected should be split between the various months instead of accounting the entire amount to the transaction date.
Principle of Full Disclosure - According to the principle of full disclosure, it is essential for companies to disclose all information regarding their financial position. The financial records of the firm should be such that it mentions all the financial transactions and activities.
Principle of Utmost Good Faith: According to the principle of utmost good faith, all the information with regards to the organization should be disclosed before taking any insurance policy.
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