| What is GAAP? | | | | here are a few basic assumptions regarding the |
| GAAP, or Generally Accepted Accounting | | | | rules. |
| Principles, refers to rules and parameters set by | | | | 1) Going Concern Assumption: The business is long |
| the Accounting Practices Board of the American | | | | term. |
| Institute of Certified Public Accountants. GAAP | | | | 2) Economic Entity Assumption: Business is an |
| also includes certain established ways of | | | | independent entity and has an identity different |
| accounting, which may or may not have been set | | | | from its owner. |
| by any authority. | | | | 3) Monetary Unit Assumption: The monetary |
| Aim of GAAP: | | | | currency that is going to be used for recording |
| GAAP aims toward making the accounting | | | | financial statements will be the stable currency. |
| procedure transparent and make it easier for | | | | 4) Periodic Reporting Assumption: Business |
| investors and creditors to get information. Here | | | | operations are to be regularly reported, and there |
| are some of the goals of GAAP. | | | | will be a regular gap between reports. |
| 1) To make information available to investors and | | | | GAAP Limits: |
| lenders so they can make sound decisions | | | | GAAP puts some limits on financial reporting. |
| regarding loans and investments. | | | | 1) The advantages of financial reporting need to |
| 2) To make information available about resources, | | | | be considered along with cost of giving the |
| funds, and finances. | | | | information. |
| 3) To help investors and lenders assess the | | | | 2) The procedures need to scrupulously follow |
| viability of an investment or a loan. | | | | GAAP practices. |
| Principles behind GAAP: | | | | 3) Given two financial reports, the most accurate |
| This section discusses some of the principles | | | | one should be selected. |
| behind GAAP. | | | | In addition to the above principles and |
| 1) Historical Cost Principle: Companies should make | | | | conventions, the financial statement needs to be |
| financial statements based on costs related to | | | | relevant and reliable, since investors and lenders |
| acquisition of assets and not fair market value. | | | | will make decisions based on it. The report should |
| This removes any confusion regarding value of | | | | follow prescribed norms so that reports of |
| liabilities. | | | | different businesses can be compared. Reporting |
| 2) Revenue Recognition Principle: The financial | | | | should be consistent, and the accounting method |
| statement must state whether revenue is | | | | should not vary too much over time. GAAP helps |
| realized or earned. | | | | financial reports achieve all of the above and |
| 3) Full Disclosure Principle: The extent of | | | | prevents financial misrepresentation. If you need |
| information disclosure is based on analysis of | | | | to know more about how to implement GAAP in |
| tradeoff. | | | | your financial statements, you can consult small |
| 4) Matching Principle: Expenses have to be | | | | business professionals, who will help you draw up |
| proportionate to revenues. | | | | a financial report that implements the major |
| GAAP Suppositions: | | | | GAAP norms. |
| In order to make GAAP implementation effective, | | | | |