What is GAAP
- A set of common accounting rules, standards, and procedure issued by the financial accounting standard board (FASB)
- combination of AUTHORITIVE standards set by the policy board
- the commonly accepted ways of recording and reporting financial info
- aims to improve CLARITY, CONSISTENCY AND COMPARABILITY of communication of info
- Public companies MUST follow GAAP
- Ultimate goal of GAAP is to ensure a companies financial statements and COMPLETE and CONSISTENT
Principles of GAAP
1. Regularity
- its a given that he accountant has adhered to the GAAP rules and regulations as a standard
- all the rules and policies of a standard accounting practice are followed in the organization on a regular basis
2. Consistency
- accountant should apply the same rules and standards throughout the whole reporting process over one financial period.
- It ensures financial comparison between two periods
- Fully disclose any change or update in accounting standards
3. Sincerity
- accountant should provide an accurate and impartial picture of the companies financial situation
4. Permanence of methods (consistent and comparable)
- The procedure used in fin. accounting should be consistent and comparable to the companies financial information
5. Non-Compensation (transparent and Impartial)
- Accountant must record both POSITIVE and NEGATIVES in financial statement
- Both should be reported with full transparency
6. Continuity (perpetuity)
- While valuing assets, it should be assumed that the business will continue to operate in the future
7. Periodicity
- All the accounting entries should be distributed across the appropriate periods of time.
- e. g Revenue should be reported on its relevant accounting-period
8. Materiality (disclosure)
- Accountant must fully disclose of all financial data and accounting information in financial reports
9. Good Faith (honesty)
- It pre-supposes that all the parties involved remain honest in all transactions
- The word is commonly used in Insurance industry