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What is GAAP?

What is GAAP?

GAAP stands for Generally Accepted Accounting Principles. It is the set of rules and guidelines for U.S. companies to follow. GAAP regulates financial reporting for public companies, private businesses, non-profits, and government authorities. This means that GAAP outlines the procedures to make sure that businesses are recording their financials in the same way.

GAAP Principles

The principles in GAAP ensure transparency and consistency. This includes the following topics:

The overall philosophy behind these principles is to prevent deceptive recording.

What is IRFS?

While the United States follows the GAAP, most of the developed world follows the International Financial Reporting Standards (IFRS.) In 2008, the United States decided to move towards adopting the IFRS to be more consistent with the rest of the world. While the long term effects are only speculative, the short term changes will have an immediate impact on accountants, managers, and investors.

IFRS vs GAAP

What is the benefit of following the same set of guidelines as the rest of the world? One major advantage of having the same international financial reporting guidelines is the effect on investors. Investors will be able to compare and contrast investments between nations more accurately.

For example, if there is one startup in the United States and one in London, then they will likely use different methods for financial reporting. This could make the investor’s decision very difficult. If inventory and depreciation are valued differently, then the investor might not fully understand the true standing of these startups.

What is GAAP

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Accounting Principles 5, 6, and 7

See Also:
Accounting Principles 1, 2, and 3
Continuous Accounting: The New Age of Accounting
Accounting Concepts
Point of Sale (POS) Method
Generally Accepted Accounting Principles (GAAP)
Financial Accounting Standards Board (FASB)
Adjusting Entries
Accumulated Amortization

Accounting Principles 5, 6, and 7 Description

Basic accounting principles are both generally held and regulated under Generally Accepted Accounting Principles (GAAP). The Financial Accounting Standards Board (FASB) also provides rulings and general practices with regard to these accounting principles. Some of these principles of accounting also contain underlying concepts or methods that may be used as it pertains to that company’s particular industry or business venture. Let’s look at the Revenue Principle, the Matching Principle, and the Disclosure Principle

Revenue Principle

The Revenue Principle, also known as the Revenue Recognition Principle, contains several different methods regarding the timing and amount to record as revenue. In accordance with this, meet the following three conditions for each and every sale. First, a company must have performed a service or provided a product to expect a return from the buying party. Then the amount of the sale should be readily measurable. Finally, there should be a reasonable amount of expectation that the company will receive payments. But to insure that this happens, the following six methods of accounting for revenue. which differ according to conditions that surround the business model, can be found below:

1) Sales Method

2) Completed Production Method

3) Collection Method

4) Installment Method

5) Percentage of Completion Method

6) Completed Contract Method

Matching Principle

The matching principle is a way of setting the expenses of a company next to their respective revenues. Once you use one of the above revenue principle methods, then match up the incurred expenses during the same period that the revenue was recognized in the company. But by doing this, the company establishes that the income for the period revenue has been recognized.

Disclosure Principle

Lastly, the disclosure principle states that a company’s financial statements need to and should contain enough information to outsiders so that they can make well informed decisions about a company. In most cases this is pretty straightforward, but for some policies, issues, and uncommon transactions the way in which a company should disclose information can become unclear. Include the following to cover the majority of issues and events within the financials as to avoid misleading investors.

1)  Significant Accounting Policies

2) Probable Losses

3) Accounting Changes

4) Subsequent Events

5) Business Segments

If you want to learn more financial leadership skills, then download the free 7 Habits of Highly Effective CFOs.

accounting principles 5, 6, and 7, revenue principle, matching principle

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accounting principles 5, 6, and 7, revenue principle, matching principle

 

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Accounting Principles 1, 2, and 3

See Also:
Accounting Principles 5, 6, and 7
Continuous Accounting: The New Age of Accounting

Accounting Principles 1, 2, and 3

Basic accounting principles are generally held and regulated under Generally Accepted Accounting Principles (GAAP). The Financial Accounting Standards Board (FASB) also provides rulings and general practices with regard to these accounting principles. Some of these principles of accounting also contain underlying concepts or methods that may be used as it pertains to that company’s particular industry or business venture. Accounting Principles 1, 2, and 3 include the following:

  • Reliability Principle
  • Comparability Principle
  • Cost Principle

Reliability Principle

Also known as the Objectivity Principle, this basic accounting principle requires that all companies provide accounting information that is without significant error or bias. The reliability principle is generally required for publicly traded corporations under the Securities Exchange Act of 1934.

Comparability Principle

The comparability principle is based off the idea that information is much more useful if the firm establishes a certain standard or benchmark and it’s general competition. There are generally two guidelines that firms should follow when using the comparability principle:

1) The first of these is the requirement that accounting information remain comparable from business to business. This is generally performed when companies register with different exchanges. Different exchanges generally have accounting concepts and principles like an accounting concept such as the Stable-Monetary Unit or basic accounting principles such as GAAP or IFRS so information is easily read and readily comparable to other companies in the market.

2) The second part is the requirement that any single businesses’ statements or reports be comparable from one period to the next. Generally speaking when a company adopts a certain method or a principle of accounting, it must remain with that accounting basic from quarter to quarter and year to year.

Cost Principle

The Cost Principle generally states to record assets and services at their purchase or historical cost. This is one accounting concept principle that allows for more conservative valuations under the concept of conservatism. This also provides more meaningful statements. There is not a requirement for accountants to mark all assets to the market.

To learn more financial leadership skills, download the free 7 Habits of Highly Effective CFOs.

Reliability Principle, Cost Principle, accounting principles 1, 2, and 3

Strategic CFO Lab Member Extra

Access your Flash Report Execution Plan in SCFO Lab.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

accounting principles 1, 2, and 3, Cost Principle, Reliability Principle

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