Generally Accepted Accounting Principals – a Primer

Accountants are the guardians of the rules. They are the ones who make sure that when we look at a financial statement, we can be reasonably built using sound accounting practices and is comparable to other financial statements audited by other firms.

That sounds like a daunting task, but never fear. The accounting professional is in business to help you through this.

The accounting profession is self-regulated. They decide the most appropriate way to record activity of the company in the financial books of record. They do so through a board of experienced professionals August, the Council of the accounting practices of the American Institute of Certified Public Accountants (AICPA). This group defines what is known as “generally accepted accounting principles or GAAP, all public accountants must comply on behalf of all clients.

The process used to introduce new or modify old GAAP GAAP is beyond the scope of this paper, but it’s a long process with many opportunities to review all public accountants and entrepreneurs.

THE PURPOSE OF GAAP

The main objective of having GAAP is to ensure consistency in accounting practices, not only within a company, but in all regulated industries. The SEC requires all public companies must be audited at least annually by a Certified Public Accountant (CPA). The APC ensures that shareholders can rely on the company’s financial information because it is in accordance with GAAP.

By preparing all financial information in accordance with GAAP,

• Management may depend on the records and make course corrections to their department or company as a whole for the betterment of the company.

• Investors and lenders can make solid decisions based on the company’s financial records.

• Shareholders and potential shareholders obtain a precise picture of the financial health of the company.

• Stock can be valued fairly in the market

• deceptive, unfair and even criminal practices are minimized.

PRIMARY PRINCIPLES

The following are some basic principles that inspire with GAAP. Ie no means a complete description of GAAP, which is very detailed and require much study to become an expert, but it shows the continuing objective of detail behind that.

1. Historical cost principle: In general, the value of the assets of a company is the original cost of assets less depreciation or amortization appropriate. This prevents companies to state their assets at market value, not only is it difficult to determine, but very subjective in nature. The historical cost provides the actual cost is very objective.

2. Main revenue recognition: This simply states that revenues are recognized when earned, which can be a different time of receipt. For example, if your company offers a service in late December, but the customer does not pay until January next year, the total revenue of December, include that amount. January did not, although that is the month in which payment was deposited.

3. Full Disclosure Principle: Any information, whether or not strictly financial, that is relevant to the business and may impact future must be disclosed. All transactions must be posted, of course. But more, this principle provides for the disclosure of contingencies. For example, if your company is being sued, the claim must be analyzed by the expected opportunity loss. This contingency should be disclosed in a footnote to financial statements. This is to prevent a loan officer or investor of not knowing this information, possibly affecting when making decisions about investments or loans to the company.

4. Matching Principle: In short, revenues should correspond to expenses that helped create it. This is why they have the accruals and deferrals. The costs associated with obtaining income for this period must also appear in this period.

GAAP ASSUMPTIONS

GAAP assumes the following:

1. Va hypothesis company: The company or entity is a “going concern” and is unlikely to cease operations in the current year. It is expected to remain in business for the foreseeable future. Any exceptions to this assumption must be disclosed.

2. Economic Entity Assumption: The company is a separate and independent entity from its owners.

3. Monetary Unit Assumption: The currency used to measure the entity’s financial performance is stable.

4. Regular reporting of the Assumption: Business operations are reported on regularly, usually every year. The fiscal year need not be the same as the calendar year. This is usually set according to the business cycle for the particular company.

Using generally accepted accounting principles is needed for all business entities. But one need not be an expert in GAAP itself. Hire a good accountant. A CPA may be necessary if your company is public property, or the loan or business requirements.