A Primer of Generally Accepted Accounting principles

The ones who maintain standards are accountants. They make sure that the financial statements we see are comparable with those of other companies, find here.

It may seem daunting but it is not impossible. Rely on your accountant to help you with this.

Accounting professionals are self-regulated. They determine the way company activity is recorded on financial books. They are assisted by the Accounting Practices Board of American Institute of Certified Public Accountants, a distinguished panel of professionals. This group establishes the “Generally Accepted Accredited Principals” (GAAP) that all public accountants must use for their clients.

This paper does not address the changes or introductions of GAAP. The paper is intended for CPAs, as well as business professionals.

GAAP’S MISSION

GAAP was established in order to assure consistent accounting practices for all regulated businesses. SEC requirements that all publicly traded companies have their books audited at least one time per year by a Certified Public Accountant. Stockholders can rely on the financial information of the company’s CPA as it is in compliance with GAAP.

All financial information must be prepared in accordance with GAAP.

Management can trust these records and make necessary corrections in order to improve their department’s performance or the company.

Investors can have confidence in their ability make sound financial decisions, based on the financial records.

Prospective stockholders are able to see the financial health of the company.

Stocks can be fair priced on the market

o All deceptive, unfair, and criminal practices are minimized.

PRIMARY PRINCIPLES

These are the core principles GAAP is founded on. It does not contain an exhaustive description. The document is quite detailed and will require a lot more study. But it does reveal that there is an important purpose behind the details.

1. Historical Cost Principle. It is the original cost of assets that determines their value, less appropriate amortization or deduction. This allows companies avoid having assets listed at their market prices, which is difficult and subjective. Historical cost can give the actual cost, which may be very objective.

2. Revenue Recognition Principle: Revenue recognition is when it’s earned. If your company offers a service in December and the customer pays until January, December revenue will include any difference. Regardless of the month in which you made the payment, January will not include that amount.

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