Generally Accepted Accounting Principles (GAAP)
Generally Accepted Accounting Principles (GAAP) are the ‘ground rules,’ which are the principles for preparing financial statements. These are always changing. These include accounting ideas, measuring methodologies, and financial statement presentation standards. These Accounting Principles allow for the comparison of multiple organizations as well as the operational performance of the same firm over many years. These principles provide credibility to financial statements.
GAAP compliance transparentizes the financial reporting process by standardizing assumptions, language, definitions, and processes.
GAAP standards provide transparency and consistency, allowing investors and stakeholders to make smart, evidence-based choices.
Some of the Generally Accepted Accounting Principles are as follows:
1. The entity concept/the notion of independent entities:
A business is treated as a distinct entity from its owner under this concept. Private expenditures/spending of the owner are not documented in the accounts of the corporate organization. For example, money received as a reward by a person has no effect on the books of accounts because no commercial transaction is involved.
2. The principle of cost:
This concept states that an asset on the balance sheet is recorded at its nominal or original cost when purchased by the firm.
3. Assumption of going-concern:
In accounting, the ‘going concern’ idea assumes that the company will continue to exist in the near future. This assumption is also connected to the cost principle because without the ‘going concern’ idea, accountants would have to record all assets at the current price rather than historical cost.
4. The principle of objectivity:
specific, factual foundations for asset appraisal; objective measurement of transactions. An accounting concept that states that information provided in a company’s financial statement must be backed by genuine and factual data and should not be dependent on personal feelings or opinions.
5. The principle of stable currency:
The currency stays very stable, and the rate of inflation is close to zero.
6. The principle of adequate disclosure:
Facts required for appropriate interpretation of statements; “subsequent occurrences,” litigation against the company, assets pledged as securities/collateral, contingent liabilities, and so on; represented in Notes.
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