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Generally Accepted Accounting Principles:

 

US GAAP refers to the standard framework of guidelines for financial accounting used in the United States; generally known as Accounting Standards. GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing , and in the preparation of financial statements.

 

The rules and procedures for reporting under GAAP are complex and have developed over a long period of time. Currently there are more than 150 "pronouncements" as to how to account for different types of transactions, ranging from how to report regular income from the sale of goods, and its related inventory values, to accounting for incentive stock option distributions. By using consistent principles, all companies reporting under GAAP report these transactions on their financial statements in a consistent manner.

 

The various rules and pronouncements come from the Financial Accounting Standards Board (FASB) which is a non-profit organization that the accounting profession has created to promulgate the rules of GAAP reporting and to amend the rules of GAAP reporting as occasion requires. The pronouncements come as Statements of the Financial Accounting Standards (SFAS).

 

    Basic Accounting Principles:

§   Revenue recognition principle requires companies to record transactions on an accrual basis, that is when revenue is (1) realized or realizable and (2) earned, not when cash is received.  

 

§   Matching principle. Expenses have to be matched with revenues as long as it is reasonable to do so. Expenses are recognized not when the work is performed, or when a product is produced, but when the work or the product actually makes its contribution to revenue. This principle allows greater evaluation of actual profitability and performance. Depreciation and Cost of Goods Sold are good examples of application of this principle. Costs with no connection with revenue are generally charged as expenses to the current period. e.g. office salaries and other administrative expenses.

 

§   Historical cost principle requires companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities. This principle provides information that is reliable (removing opportunity to provide subjective and potentially biased market values), but not very relevant. Thus there is a trend to use fair values. Most debts and securities are now reported at market values.

 

§   Full disclosure principle. Information disclosed should be enough to make a judgment while keeping costs reasonable. Information is presented in the main body of financial statements, in the notes or as supplementary information.

 

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