GAAP
Accounting is the identification, measuring, analyzing, verifying, interpreting, recording, and communication of financial information. It gives information on profitability, cash flow status, and the present value of assets and liabilities, useful in making informed business decisions. GAAP are commonly accepted standards, principles, and procedures set by the Financial Accounting Standards Board (FASB) that all accountants must follow when compiling and preparing financial statements (Smith, 2019). The purpose of GAAP is to improve the comparability, clarity, and consistency of financial information (Tuovila, 2020).
The five major Generally Accepted Accounting Principles (GAAP) are matching, cost, revenue recognition, full disclosure, and objectivity principles (iEduNote, n.d). The cost principle states that the original price of an item paid during its acquisition, whether cash or its equivalent, should be used in financial reporting and not its current market value or cost of re-sale. Therefore, the price of an asset is not adjusted upwards for inflation (Griffin, n.d.).
The matching principle outlines that expenses accrued during a period of accounting should be matched with revenues gained during that same period. This principle uses an accrual concept of accounting as the occurrence of expenses and revenues is the main focus rather than the timing and amount of actual cashflows. Therefore, outstanding and pre-paid expenses, as well as accrued and unaccrued revenues, have to be adjusted when applying the matching principle (iEduNote, n.d).
In the revenue recognition principle, revenue is recorded after a sale is made whether or not payment has been made or received. Revenue is recognized in the income statement of the company. The full disclosure principle states that accountants should reveal all relevant financial information in financial statements for it to be of use to all users. This information is mostly presented in footnotes in financial statements (Griffin, n.d.). According to the objectivity principle, accounting data should be free from the accountant’s subjectivity and have enough proof to back it. The accountant must use facts that can be verified and instead of assumed data even if the expected data seems much better (iEduNote, n.d).
References
Ryan Smith (2019). What is Accounting and Why is it Important for Your Business? Retrieved on March 17, 2020, from https://bench.co/blog/accounting/what-is-accounting/
Alicia Tuovila (2020). Generally Accepted Accounting Principles (GAAP). Retrieved on March 17, 2020, from https://www.investopedia.com/terms/g/gaap.asp
Griffin, Dana. (n.d.). GAAP Basics. Small Business – Chron.com. Retrieved from http://smallbusiness.chron.com/gaap-basics-4057.html
iEduNote (n.d). 5 Accounting Principles Retrieved on March 17, 2020, from https://www.iedunote.com/accounting-principles