What Is GAAP & How Does It Work?
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How GAAP Works
10 accounting principles FASB rules and standards Generally accepted industry practices
Pros and Cons of GAAP
1. Principle of Regularity
2. Principle of Consistency
3. Principle of Sincerity
4. Principle of Permanence of Methods
5. Principle of Non-Compensation
6. Principle of Prudence
7. Principle of Continuity
8. Principle of Periodicity
9. Principle of Materiality
10. Principle of Utmost Good Faith
Specific Time Period Assumption All financial statements have to indicate the date or time period for the activity being reported. Business Entity Assumption The business exists apart from its owners, creditors, and anyone else. This assumption applies even if your business is a sole proprietorship, since, legally, your business can exist independently of you. Going Concern Assumption The business will continue to operate for the foreseeable future. If an accountant is concerned the business might be forced to close and liquidate, they are required to disclose this concern under GAAP. Monetary Unit Assumption All business activity must be recorded in the same currency. This is why you have to go through the extra effort to complete your bookkeeping for foreign transactions.
What Are the Basic Principles of Accounting?
Revenue Recognition Principle:This is an accrual basis accounting principle which says that all revenue is recorded on an income statement when it’s earned, regardless of when payment for the product or service is actually received. Historical Cost Principle:This means that the cost of an item doesn’t change in the financial reporting. Even if you’ve bought something that has dramatically increased in value since you purchased it, your accountant will still report the asset at the amount for which it was obtained, regardless of fair market value. Matching Principle:All sales and the expenses used to produce those sales (such as wages and overhead costs) are reported in the same accounting period. In other words, they are reported on an accrual basis vs a cash basis (in which revenue is reported when received and expenses are reported when cash is spent). Full Disclosure Principle:A business must disclose all information that relates to the function of its financial statements in notes accompanying the statements. This ensures that investors or stockholders are not misled by anything on a company’s financial reports.
FASB Rules and Standards
Generally Accepted Industry Practices
Why GAAP Compliance is Important
History of GAAP
Prohibit deceit and fraud in the sale of securities Require investors be able to receive any financial information revolving around the sale of securities.
What Are Non-GAAP Measures
Alternatives to GAAP
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