Accounting can be defined as the language of finance. It describes the financial position of any business. Accounting is the process that helps in recording, summarizing, analyzing, and reporting the financial data or the transaction and also helps in giving the strength to the company financially and makes the company stable for the longer term.
There is one financial term that plays a major role in understanding accounting concepts and standards, i.e., GAAP, which is Generally Accepted Accounting Principles.
What are Generally Accepted Accounting Principles?
GAAP is merely the collection of a commonly followed set of accounting rules and standards which are used in financial reporting. These set of rules are issued by the Financial Accounting Standards Board, which is the non-profit organization which is responsible for establishing accounting and financial reporting standards for companies and non-profit organizations in the United States. GAAP is the combination of official rules that are set by policy boards and the commonly accepted accounting information.
GAAP governs the world of accounting by following the general rules and guidelines of the accounting principles. The one and only ultimate goal of GAAP is to analyze the company’s financial status, and that should be complete, consistent, and comparable, which is helpful for the investors to inspect and extract the useful information from the company’s accounting statement.
Generally, GAAP encircles the –
- Basic Accounting principles or guidelines
- Financial standards issued by the leading accounting body.
- Accounting practices of the industries to cover the unorganized and unusual scenarios.
Benefits of GAAP Accounting
Every organization needs better financial stability to remain in this competitive world, and GAAP helps the organizations in making the companies stable for a long time.
GAAP delivers transparency and continuity, which enables the investors and stakeholders to take the sound and evidence-based decisions that can give them a better profit, but this needs a better understanding of the general accounting standards and principles. There are several other benefits of general accounting principles that are as follows –
- GAAP guidelines help business in maintaining the consistency and integrity in their financial information and also reduce the risk and frauds of misrepresentation.
- It safeguards the rights of stakeholders and provides assurance to all the interested investors or parties.
- The consistency of GAAP guidelines leads to a fairer and accurate presentation and also helps in comparing financial statements, and this helps in understanding the overall performance of the organization.
- It identifies the weaker section of business that needs improvement and also analyzes the benefits of changes that are to be implemented.
- GAAP standards maintain the trust and interest of everyone that prepares the financial statement by using the accounting standards.
- GAAP also provides the facility to compare the auditing of financial statements with the different companies that help in creating a better conclusion or results about the company’s overall performance.
- The principally driven accounting standards help in understanding the financial statements to look deeper into the several transactions, which will be helpful in giving professional judgments.
10 Generally Accepted Accounting Principles
There are ten basic tenets of GAAP that helps in remembering the main missions and directions of the GAAP systems that are as follows –
1. Principle of Regularity
The accountant has to follow or stick to the GAAP rules and regulations and treat them as a Standard.
2. Principle of Consistency
The finance professionals are forced or bound to follow these standards throughout the financial reporting to avoid errors and inconsistency. Accountants are expected to completely disclose every reason behind any changes or updates in the financial reports.
3. Principle of Sincerity
The accountant aims to provide a better and accurate characterization of the company’s overall financial situations.
4. Principle of Permanence of Methods
The procedure and the methods applied in making the financial reports should be accurate and presented in a better manner so that every investor and stakeholder can understand them easily.
5. Principle of Non-Compensation
The reporting style should be completely transparent, and every clause or update should be clearly mentioned in the report, and all the positive and negative aspects should be reported without any assumption of debt compensation.
6. Principle of Prudence
Highlight the fact-based representation of the financial data that is not blurred by any theory or hypothecation.
7. Principle of Continuity
While stating any financial information or while valuing assets, it should be assumed that the business will continue to operate.
8. Principle of Periodicity
The company’s sophisticated and ongoing entries should be distributed across the appropriate period of time, i.e., quarterly, half-yearly, and annually. For example, revenue should be divided into the relevant span of time periods.
9. Principle of Materiality
Accountants must strive for the complete disclosure of each and every updated or any changes which are helpful in giving a better explanation or presentation of the financial reports.
10. Principle of Utmost Good Faith
Utmost good faith or in the Latin phrase it is known as “Uberrimae Fidei” which is used in insurance sector where insurer gives the assurance to the insured about their policies which is helpful in maintaining the long term trust and honesty within the customers and also gives the better growth to the organizations for the long term in future.
So, these are ten general principles of GAAP accounting, which should be followed by every organization to plan the mission and vision.
This whole report concludes about the accounting principles and the GAAP, which helps in summarizing the accounting data into financial reports and statements and gives transparency, and it is also helpful to assist decision making.
This report also summarized the GAAP and their benefits in the organization and even ten basic principles of GAAP accounting that help in boosting up the organization. GAAP sets the stage for the investors and stakeholders to get a clear view of the company’s financial status to maintain integrity and honesty.