Generally Accepted Accounting Principles
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.
Contents * 1 Overview * 1.1 Principle of regularity * 1.2 Principle of sincerity * 1.3 Principle of the permanence of methods * 1.4 Principle of non-compensation * 1.5 Principle of prudence * 1.6 Principle of continuity * 1.7 Principle of periodicity * 2 United States' GAAP Hierarchy * 3 National GAAP ...view middle of the document...
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 is mitigating the previous one about 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.
United States' GAAP Hierarchy
In the United States, GAAP derives, in order of importance, from:
1. issuances from an authoritative body designated by the American Institute of Certified Public Accountants(AICPA) Council (for example, the Financial Accounting Standards Board Statements, AICPA Accounting Principles Board Options, and AICPA Accounting Research Bulletins);
2. other AICPA issuances such as AICPA Industry Guides;
3. industry practice; and
4. into para-accounting literature in the form of books and articles.
| House of GAAP |
(Most authoritative) | FASB Standards and Interpretations | Accounting Principles Board (APB) Opinions | AICPA Accounting Research Bulletins (ARBs) |
Category (B) | FASB Technical Bulletins | AICPA Industry Audit and Accounting Guides | AICPA Statements of Position (SOPs) |
Category (C) | FASB Emerging Issues Task Force (EITF) | AICPA AcSEC Practice Bulletins |
(Least authoritative) | AICPA Accounting Interpretations | FASB Implementation Guides (Q and A) | Widely recognized and prevalent industry practices |
Category A and B are considered authoritative. Category C and D are considered marginally authoritative, thoughts on interesting and unique issues, but could be invalid given a large level of materialism. Category C and D are considered a talking and reasoning phase of bringing issues to an authorize level of GAAP.
Every country has their own version of GAAP with standards set by a national governing body.
Required Departures from GAAP
Under the AICPA's Code of Professional Ethics under Rule 203 - Accounting Principles, a member must depart from GAAP if following it would lead to a material misstatement on the financial statements, or otherwise be misleading. In the departure the member must disclose, if practicable, the reasons why compliance with the accounting principle would result in a misleading financial statement. Under Rule 203-1-Departures from Established Accounting Principles, the departures are rare, and usually take place...