Generally Accepted Accounting Principles (GAAP) is an international recognized and accepted concept of standard framework and rules to ensure uniform financial reporting across the globe. GAAP is the general term which covers all the standards, principles, conventions, and assumptions used in recording the financial transitions and reporting the financial information worldwide enabling the readers to make homogeneous judgments and inferences about the companies.
The standards covered in GAAP were labeled as International Accounting Standards (IASs) up to 2001 and after that they are referred to as International Financial Reporting Standards (IFRSs). International Accounting Standard Board (IASB) is the body issuing the IASs and IFRS. There are forty one IASs and nine IFRSs. These IFRSs are the sets of standards, interpretations, guidelines, rules, and procedures required to be followed in preparation and reporting the financial statements. They elaborate the disclosure requirements such as accounting policies adopted by the companies and other matters of financial significance. These standards are gaining acceptance in most of the countries where they are followed by the listed companies in financial statements and financial reporting to ensure accurate and reliable information to the stakeholders around the world.
Along with standards there are some basic principles and assumptions covered under the GAAP for financial reporting. Such principles are:
The uniformity or consistency of the accounting policies over the periods is referred to as principle of consistency. The firm may change policies over the period to distort the financial facts therefore GAAP states the accounting policies are required to be consistent over the long run.
This principle states that companies prepare and report financial statements in conformance with the applicable laws and regulations.
According to this principle the company preparing and reporting the financial statements are in good faith knows and reflects through financial statement the reality of financial position of the company.
The principle of conservatism means that company prepared the financial statements through recognizing the doubtful expenses or loss of assets and taking into account the revenues of utmost assurance.
This principle states that liability is not compensated with asset or expense is not compensated with revenue while preparing the financial statements. All the information is disclosed in letter and spirit.
Financial statements are prepared on the convention of going concern i.e. the operations of the company will remain continue for an indefinite period of time in future.
Generally Accepted Accounting Principles have precise significance for the accounting professionals, practioners, and auditors. Only such financial statements are reliable and comparable which are prepared and disclosed on the basis of GAAP. Any other financial statement where standards and conventions of GAAP are not followed can not be declared as depicting the true and fair view of the financial affairs of the company. Moreover in financial statements where standards, rules, and principles of GAAP have been ignored can not be declared as in conformance with the Generally Accepted Accounting Principles.