GAAP, which stands for Generally Accepted Accounting Principles, refers to a set of standardized accounting principles, procedures, and standards that companies use to compile their financial statements. GAAP ensures that financial reporting is consistent and reliable, making it easier for investors, regulators, and other stakeholders to understand a company's financial performance. Here are the primary components of GAAP:
Principle of Regularity: Accountants are expected to follow established rules and procedures consistently.
Principle of Consistency: Accounting methods and procedures should be consistent over time to enable meaningful comparisons.
Principle of Sincerity: Financial statements should reflect the true financial picture of a company, without the intent to deceive.
Principle of Permanence of Methods: Once a company selects an accounting method, it should stick with it unless there's a compelling reason to change.
Principle of Non-Compensation: Accountants should not offset one financial statement item against another. Each item should be reported independently.
Principle of Prudence: When faced with uncertainty, accountants should be cautious and conservative, which means not overstating assets or income and not understating liabilities or expenses.
Principle of Continuity: Assumption that a business will continue to operate unless there is significant evidence to the contrary.
Principle of Periodicity: Companies should prepare their financial statements at regular, defined intervals, such as quarterly or annually.
Materiality: This principle dictates that financial information should be disclosed if it could influence the decisions of users. Insignificant items may be omitted.
Conservatism: In uncertain situations, accountants should err on the side of caution, recognizing losses and liabilities as soon as they are probable, while only recognizing gains and assets when they are certain.
Full Disclosure: Companies should disclose all relevant information that might affect the financial statements' interpretation. This includes footnotes and additional supplementary information.
Consistency of Presentation: Financial statements should be presented in a consistent manner from one period to another.
Consistency of Reporting Entity: A company should keep the same reporting entity (the entity or entities for which financial statements are prepared) from period to period unless there is a good reason for a change.
Consistency in the Method of Computation: The same methods of computation should be used from one period to the next.
Please note that these principles can evolve over time, and there may be variations in application depending on the specific accounting standards used in a particular jurisdiction, such as Generally Accepted Accounting Principles (US GAAP) or International Financial Reporting Standards (IFRS). It's important for businesses to adhere to the applicable accounting standards in their region.
is always good to review these, in order to keep our records according to regulations. thank you!