Generally Accepted Accounting Principles

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Generally Accepted Accounting Principles (GAAP) is the standard framework of guidelines for financial accounting. It includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements.

One key aspect of GAAP is an emphasis of "general" as a conceptual realization of variables in method. Far from suggesting that all accounting exercises employ the same method and generate the same results, GAAP accommodates variation in applied accounting methods as long as the methods generally adhere to this set of principles, which are more broad than specific.

Pursuant to the foregoing, not only therefore does this provide for variation in method, the natural conclusion is GAAP creates an environment in which financial reporting results can vary depending on purpose. One company in one fiscal year can produce different reports, all completed within GAAP, for different audiences or different purposes, and all these reports can be considered correct.

A company may report financial performance considered acceptable by the accounting firm producing the review; yet upon closer investigation oddities may be revealed, requiring a restatement of all or part of the report. Recently (2006 - 2007) well known corporations such as Apple and Research In Motion had to restate certain aspects of their financial reports that met with disagreement as to their adherence to certain "best practices."

1 Overview
2 National GAAP
3 International GAAP
4 See also
5 External links

[edit] Overview

Financial accounting information must be assembled and reported objectively. Third-parties who must rely on such information have a right to be assured that the data are free from bias and inconsistency, whether deliberate or not. For this reason, financial accounting relies on certain standards or guides that are called "Generally Accepted Accounting Principles" (GAAP).

Principles derive from tradition, such as the concept of matching. In any report of financial statements (audit, compilation, review, etc.), the preparer/auditor/CPA must indicate to the reader whether or not the information contained within the statements complies with GAAP.

Principle of regularity: Regularity can be defined as conformity to enforced rules and laws. This principle is also known as the Principle of Consistency.

Principle of sincerity: According to this principle, the accounting unit should reflect in good faith the reality of the company's financial status.

Principle of the permanence of methods: This principle aims at allowing the coherence and comparison of the financial information published by the company.

Principle of non-compensation: One should show the full details of the financial information and not seek to compensate a debt with an asset, a revenue with an expense, etc.

Principle of prudence: This principle aims at showing the reality "as is" : one should not try to make things look prettier than they are. Typically, a revenue should be recorded only when it is certain and a provision should be entered for an expense which is probable.

Principle of continuity: When stating financial information, one should assume that the business will not be interrupted. This principle mitigates the principle of prudence: assets do not have to be accounted at their disposable value, but it is accepted that they are at their historical value (see depreciation).

Principle of periodicity: Each accounting entry should be allocated to a given period, and split accordingly if it covers several periods. If a client pre-pays a subscription (or lease, etc.), the given revenue should be split to the entire time-span and not counted for entirely on the date of the transaction.