GAAP and principles

GAAP refers to generally accepted accounting principles. It’s a set of procedures, accounting principles, and accounting standards related to business reporting and financial accounting. The Financial Accounting Standard Board issued these standards and guidelines that oversee the matters related to the formation and implementation of the standards to be used in financial reporting.

Does the law require GAAP?

Yes, Public companies in the United States need to follow the GAAPs and report their financial information in a prescribed format of the Financial Accounting Standard Board. The requirements of the GAAP are somewhat different from International Financial Reporting Standard. However, IFRS is acceptable in large parts of the world, including countries of the European Union.

IS GAPP different from IFRS?

Yes, Some requirements of the GAAP are different from the IFRS. GAAPs are based on the rule, and companies must adhere to some specific requirement. On the contrary, IFRS is a principle-based set of standards with greater flexibility. IFRS is an international phenomenon, and companies usually compare the performance of the companies by bringing on the same page.

What’s the goal of GAAP?

The purpose of the GAAP implementation is to bring consistency and uniformity in financial reporting and the presentation of financial information. The companies’ financial statement in the same format creates easiness for the user of the financial statement to compare the financial data.

What are the ten principles of the GAAP?

Following are the ten principles of the GAAP. These principles include regularity, consistency, the performance of methods, non-compensation, prudence, continuity, periodicity, Materiality, and utmost faith.

Principle of regularity in GAAP

Its continuous adherence to the rules and standards of the GAAP. It means assumptions, guidelines, methods, and all other aspects of the GAAP in previous periods must be the same for the current.

Principle of consistency

Presentation and treatment of the financial information must be consistent. It’s not the discretion of the accountant/company to change some aspects of the reporting in a current period. However, if some changes are made, there must be a disclosure of the same in the financial statements.

Principle of Sincerity

The company must be committed and integrated with the overall process of the accounting information and its presentation in the prescribed format. The company must do its best to learn and bring accuracy to the system of financial reporting.

Principle of Permanence of Methods

The principle states that financial information should be presented so that it becomes easy for the user to compare and make a decision. Following the guidelines of the GAAP brings consistency in the reporting formats, and things become easy to be compared.

Principle of Prudence

The prudence concept states that transactions should be posted based on facts, and no speculations should be allowed to increase positive aspects of the business. In simple words, if you think some liability is probable, you should record, but an asset can not be recorded until you are certain about its recognition.

Principle of Going concerne

The company’s financial statements are prepared considering the view that the business will continue to operate in the foreseeable future.

Principle of Periodicity / Matching concept

The matching concept states that the revenue and expenses of period A should be recorded in period A. This gives a sound picture of the company’s performance in period A.

Principle of Materiality

The concept of Materiality states that “anything that affects the decision of the financial statement user is material. As per auditing standards, things can be material in one of three ways.

Materiality by the amount

The amount is material if its volume is greater, and putting the wrong number can distort the user’s decision.

 Materiality by nature

The amount is material if its nature is open to fraud, misappropriation, or something like this. For-instance, related party transaction is material by nature.

Materiality by impact

Even a small amount can be material if its impact is higher. For instance, an entry of $10 can be material by converting loss into profit.

Principle of good faith

It means that the company/accountant should be honest in all of their dealings and transactions. The company should be honest in providing all the numbers and corresponding numbers to the best of their knowledge.

Also read, US GASP United States GAAP.

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