Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles (GAAP)

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Created By Admin Last Updated Tue, 08-Dec-2020

These are basic principles and guidelines of accounting that provides the framework for accounting rules, standards and other industry-specific accounting practices. These accounting standards are usually issued by the premier accounting body of the country.  In India, according to accounting standards issued by ICAI, the financial statements are made. Following are the general accounting principles:

1.    Principle of consistency: This principle states that if you adopt an accounting principle or a method, you have to continue to follow it consistently in the future of related accounting periods. This will provide the result from period to period that is comparable.

2.    Principle of the permanence of methods: It aims to provide the coherence and compares the financial information published by the organization.

3.    Principles of non-compensation: This principle of accounting deals to show the full details of financial accounting information of the organization and not seek to compensate a debt with an asset.

4.    Principle of prudence: This principle tells to not to overestimate the revenue amount or do not underestimate the expenses of the company. One should be conservative in recording the amount of the assets and should not underestimate the liabilities.

5.    Principle of regularity: It says that the addition of an option to choose should never increase the probability of selecting an option from the original one.

6.    Principle of sincerity: Under this principle the accountant preparing the financial report of any organization should not try to mislead anyone. All the financial information should be reported fairly and accurately.

7.    Principle of good faith: This principle deals in a fair dealing of any contact between the two respective parties so not to destroy the right of the other party to receive the benefit of that contract.

8.    Principle of materiality: It states that the accounting standards can be ignored in case if the net impact of doing so has such a low impact on the financial statements of the company as starting and maintaining solid accounting practices is essential for the growth of the company.

9.    Principle of continuity: When stating the financial information regarding of any organization or company one should assume that the business will not be interrupted that will help in the growth of the company.

10. Principle of periodicity: It tells that accountants will assume that company’s complex and the ongoing activities can be divided up and reported annually, quarterly, and on monthly basis and the company’s financial position at the end of each accounting period so that the economic activity should be analyzed and maintained.

The purpose of GAAP is to ensure the financial reporting in business activities will be transparent and consistent from one organization to another. It helps the investors to easily evaluate companies simply by reviewing their financial statements. It minimizes the risk of error in financial reporting by having numerous check and safeguards. Thus it plays a major role in business-related activities or in accounting.