What Is Meant By The Term Generally Accepted Accounting Principles?


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GAAP (Generally Accepted Accounting Principles) refers to the standard framework of guidelines for financial accounting used in any given jurisdiction.  It includes the stndards, conventions and rules accountants must follow in recording and summarizing transactions in the preparation of financial statement likes the income statement, balanace sheet, etc.

The principles are as follows:

  • Principle of regularity: Regularity can be defined as conformity to enforced rules and laws.

  • Principle of consistency: The consistency principle requires accountants to apply the same methods and procedures from period to period.

  • Principle of sincerity: According to this principle, the accounting unit should reflect in good faith the reality of the company's financial status.

  • Principle of the permanence of methods: This principle aims at allowing the coherence and comparison of the financial information published by the company.

  • Principle of non-compensation: One should show the full details of the financial information and not seek to compensate a debt with an asset, a revenue with an expense, etc.

  • Principle of prudence: This principle aims at showing the reality "as is" : One should not try to make things look prettier than they are. Typically, a revenue should be recorded only when it is certain and a provision should be entered for an expense which is probable.

  • Principle of continuity: When stating financial information, one should assume that the business will not be interrupted. This principle mitigates the principle of prudence: Assets do not have to be accounted at their disposable value, but it is accepted that they are at their historical value.

  • Principle of periodicity: Each accounting entry should be allocated to a given period, and split accordingly if it covers several periods. If a client pre-pays a subscription (or lease, etc.), the given revenue should be split to the entire time-span and not counted for entirely on the date of the transaction.

  • Principle of Full Disclosure/Materiality: All information and values pertaining to the financial position of a business must be disclosed in the records.

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