Understanding GAAP - Generally Accepted Accounting Principles
GAAP helps govern the world of accounting according to general rules and guidelines. It attempts to standardize and regulate the definitions, assumptions, and methods used in accounting across all industries. GAAP covers such topics as revenue recognition, balance sheet classification, and materiality.
The ultimate goal of GAAP is to ensure a company's financial statements are complete, consistent, and comparable. This makes it easier for investors to analyze and extract useful information from the company's financial statements, including trend data over a period of time. It also facilitates the comparison of financial information across different companies.
These 10 general concepts can help you remember the main mission of GAAP:
1. Business Entity
A business’ financial information is recorded and reported separately from the owner’s financial information
2. Going Concern
Financial statements are prepared with the expectation that a business will remain in operation indefinitely
3. Accounting Period Cycle
Changes in financial information are reported for a specific period of time in the form of financial statements
4. Objective Evidence
Each transaction is described by a business document that proves the transaction did occur
5. Unit of Measurement
All business transactions are recorded in a common unit of measurement – the dollar
6. Realization of revenue
Revenue from business transactions are recorded at the time goods or services are sold
7. Matching Expenses with Revenue
Revenue from business activities and expenses associated with earning that revenue are recorded in the same accounting period
8. Historical Cost
The actual amount paid or received is the amount recorded in accounting records
9. Adequate Disclosure
Financial statements should contain all information necessary for a reader to understand a business’ financial condition
10. Consistent Reporting
In the preparation of financial statements, the same accounting concepts are applied in the same way in each accounting period
GAAP helps govern the world of accounting according to general rules and guidelines. It attempts to standardize and regulate the definitions, assumptions, and methods used in accounting across all industries. GAAP covers such topics as revenue recognition, balance sheet classification, and materiality.
The ultimate goal of GAAP is to ensure a company's financial statements are complete, consistent, and comparable. This makes it easier for investors to analyze and extract useful information from the company's financial statements, including trend data over a period of time. It also facilitates the comparison of financial information across different companies.
These 10 general concepts can help you remember the main mission of GAAP:
1. Business Entity
A business’ financial information is recorded and reported separately from the owner’s financial information
2. Going Concern
Financial statements are prepared with the expectation that a business will remain in operation indefinitely
3. Accounting Period Cycle
Changes in financial information are reported for a specific period of time in the form of financial statements
4. Objective Evidence
Each transaction is described by a business document that proves the transaction did occur
5. Unit of Measurement
All business transactions are recorded in a common unit of measurement – the dollar
6. Realization of revenue
Revenue from business transactions are recorded at the time goods or services are sold
7. Matching Expenses with Revenue
Revenue from business activities and expenses associated with earning that revenue are recorded in the same accounting period
8. Historical Cost
The actual amount paid or received is the amount recorded in accounting records
9. Adequate Disclosure
Financial statements should contain all information necessary for a reader to understand a business’ financial condition
10. Consistent Reporting
In the preparation of financial statements, the same accounting concepts are applied in the same way in each accounting period