Generally Accepted Accounting Principles.docx
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1、GAAPGeneral Accepted Accounting PrinciplesGenerally accepted accounting principles, or GAAP as they are more commonly known, are rules for the preparation of financial statements. Every publicly traded company must release their financial statements each year. These statements are used by investors,
2、 banks and creditors to determine the financial health of the company and its suitability for investment or extension of credit. In order to properly compare and evaluate companies and their results, the financial statement must provide similar information in a similar format. Every country has its
3、own generally accepted accounting principles, and all publicly released financial statements must comply with these rules.Ads by GoogleIFRS Financial StatementsAutomatically create customised IFRS-compliant statements www.cqs.co.zaLearn ACCA from Home360 Hours Online ACCA Video Course LSBF Tutors, 2
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5、de Easy YouTube Videos, Texts, Figures Although there is no comprehensive list of generally accepted accounting principles, the structure is based around four key assumptions, four basic principles and four basic constraints.Four Key AssumptionsThe key assumptions in generally accepted accounting pr
6、inciples are: business entity, going concern, monetary unit and time period principle. The business entity assumption is the idea that the business functions as a legal and financial entity separate from its owners or any other business. This assumption means that all the amounts shown as revenue or
7、 expense in the financial statements are for the business alone and do not include any personal expenses. Going concern is the assumption that the business will operate for the foreseeable future. This is important when calculating the values for assets, depreciation and amortization. The monetary u
8、nit assumption is that all the amounts listed use one stable currency, and that any amounts in another currency are clearly listed. Time period assumes that all the transactions reported did in fact occur within the time period as listed. Gaap AccountingGenerally Accepted AccountingGenerally Accepte
9、d Accounting PrinciplesGovernmental AccountingAccounting ResourcesGaap BookAccounting ReferenceFour Basic PrinciplesThe four basic principles in generally accepted accounting principles are: cost, revenue, matching and disclosure. The cost principle refers to the notion that all values listed and re
10、ported are the costs to obtain or acquire the asset, and not the fair market value. The revenue principle states that all revenue must be reported when is it realized and earned, not necessarily when the actual cash is received. This is also known as accrual accounting. The matching principle holds
11、that the expenses in the financial statement must be matched with the revenue. The value of the expense is included in the financial statements when the work product is sold, not necessarily when the work or invoice is issued. Finally, the disclosure principle holds that information pertinent to mak
12、e a reasonable judgment on the companys finances must be included, so long as the costs to obtain that information is reasonable. Ads by GoogleIAS GAAPGerman GAAPLease Accounting FasbCRM Accounting ReportingFour Basic ConstraintsThe four basic constraints in generally accepted accounting principles
13、are: objectivity, materiality, consistency and prudence. The objective constraint states that all the information included in the financial statements must be supported by independent, verifiable evidence. When deciding what to include or exclude from the financial statements, the significance of th
14、e item must be considered under the materiality constraint. If this information would be significant to a reasonable third party, it must be included. The company is required to use the same accounting methods and principles each year under the consistency constraint and any variation must be report
15、ed in the financial statement notes. Under the constraint of prudence, accountants are required to choose a solution that reduces the likelihood of overstating assets and income.Ads by GoogleGAAP is an international convention of good accounting practices. It is based on the following core principle
16、s. In certain instances particular types of accountants that deviate from these principles can be held liable. The Business Entity ConceptThe business entity concept provides that the accounting for a business or organization be kept separate from the personal affairs of its owner, or from any other
17、 business or organization. This means that the owner of a business should not place any personal assets on the business balance sheet. The balance sheet of the business must reflect the financial position of the business alone. Also, when transactions of the business are recorded, any personal expen
18、ditures of the owner are charged to the owner and are not allowed to affect the operating results of the business.The Continuing Concern ConceptThe continuing concern concept assumes that a business will continue to operate, unless it is known that such is not the case. The values of the assets belo
19、nging to a business that is alive and well are straightforward. For example, a supply of envelopes with the companys name printed on them would be valued at their cost. This would not be the case if the company were going out of business. In that case, the envelopes would be difficult to sell becaus
20、e the companys name is on them. When a company is going out of business, the values of the assets usually suffer because they have to be sold under unfavourable circumstances. The values of such assets often cannot be determined until they are actually sold.The Principle of ConservatismThe principle
21、 of conservatism provides that accounting for a business should be fair and reasonable. Accountants are required in their work to make evaluations and estimates, to deliver opinions, and to select procedures. They should do so in a way that neither overstates nor understates the affairs of the busin
22、ess or the results of operation.The Objectivity PrincipleThe objectivity principle states that accounting will be recorded on the basis of objective evidence. Objective evidence means that different people looking at the evidence will arrive at the same values for the transaction. Simply put, this m
23、eans that accounting entries will be based on fact and not on personal opinion or feelings.The source document for a transaction is almost always the best objective evidence available. The source document shows the amount agreed to by the buyer and the seller, who are usually independent and unrelat
24、ed to each other.The Time Period ConceptThe time period concept provides that accounting take place over specific time periods known as fiscal periods. These fiscal periods are of equal length, and are used when measuring the financial progress of a business.The Revenue Recognition ConventionThe rev
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