Generally accepted accounting principles (GAAP) are used to account for a company’s transactions, assets, losses and other accounts, as well as to prepare financial statements and report finances. The purpose of GAAP is to uphold a certain accounting standard and to solidify an acceptable way of preparing financial statements. GAAP allows an entity to achieve these basic goals via established accounting principles.
The History Of GAAP
Part code of ethics and part industry guidelines, GAAP is set by the Financial Accounting Standards board (est. 1973) and embraced by many prominent accounting entities in the US. Companies are expected to follow the GAAP standards to ensure consistency in the industry, and a company should prepare all financial data according to the principles.
The purpose of generally accepted accounting principles is to eliminate misuse of accounting procedures and systems, correct abuses and incorporate regulations. While these generally accepted accounting principles are specific to the United States, many countries have their own version of GAAP some quite similar in scope and goals while other countries have significant variations from the US standards of accounting.
What Are The Main Principles Of GAAP?
GAAP is made up of several different kinds of ethical and best practice concepts, all based on certain assumptions. There should be the assumption that the business is its own entity and that the business will not attempt liquidation or sellout. It also expects that the currency will remain stable. Set financial principles are in effect, including cost principle, revenue principle, matching principle and disclosure principle. These principles are based on sound financial and accounting practices that reflect a standard of consistency, regularity and proper business performances.
There are also constraints in place, and these include the objectivity principle (where company financial statements are produced objectively), materiality principle (where all significant items are reported), consistency principle (sticking to the same methods each year) and prudent principle (where the most conservative approach is taken).
It is possible for a company to use non-GAAP financial measures, but they are required to disclose this information to investors and in other public matters so that proper comparisons can be made. There are other standardizations that financial statements can be prepared by under certain conditions.