Generally Accepted Accounting Principles

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Generally Accepted Accounting Principles (GAAP) refers to the standard of guidelines for financial accounting utilized in any given jurisdiction. It includes the standards, conventions, and rules which accountants follow in recording and summarizing transactions, and preparing of financial statements.

The information in financial accounting must be objectively assembled and reported. Third-parties who rely on such information have a right to be assured against data which has been tainted by bias and inconsistencies. It is for such reason that financial accounting relies on Generally Accepted Accounting Principles.

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

Principle of Regularity: conformity to enforced rules and laws.

Principle of Consistency: accountants are required to apply the same methods and procedures from period to period.

Principle of Sincerity: the accounting unit should, in good faith, reflect the reality of the company’s financial status.

Principle of the Permanence of Methods: aims to allow the coherence and comparison of the financial information published by the company.

Principle of Non-Compensation: the full details of the financial information should be shown, and the auditor should not seek to compensate a debt with an asset, a revenue with an expense, etc.

Principle of Prudence: aims to show the reality As Is. 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: one should assume that the business will not be interrupted when stating financial information. 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.

Principle of Periodicity: Accounting entries 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 not be counted for entirely on the date of the transaction but be split to the entire time-span.

Principle of Full Disclosure/Materiality: Records must show a complete disclosure of conformation and values pertaining to the financial position of a business.

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