A set of rules governs the accounting field. The universal General Accepted Accounting Principles have a set of standards that contributes to its relevance to accounting. These General Accepted Accounting Principles are ideally crucial in accounting as they dictate the conducts and procedures every accounting activity should follow. Therefore, these accepted accounting principles are universally accepted and followed whether in communicating on financial statements at a private firm or at large scale involving the public.
The GAAP has essential components that enable it been an essential tool they are;
- Basic accounting principles and guidelines
- Detailed rules and standards issued by the Financial Board
- Generally accepted industry principles
Accounting principles explained (GAAPs)
Accounting principles and guidelines ground the GAAP, these principles are summarized below into ten main policies and guidelines
Economic Entity Assumption
This principle defined as exclusively separating activities of a business entity from those recorded activities of the owner and any other business activities. Thus, when keeping records f let’s say different business entities, a separate record representing each of these is ideal.
Monetary Unit Assumption
States that only events recorded in financial books can express and measured into monetary value; information that has no monetary value is not important in financial accounting, thus not registered.
Time Period Assumption
This principle assumes that business activities should be divided into period. These periods can be quarterly or yearly period, and in help, business firms prepare their financial statements to review their progress and track their attainment in achieving business goals.
It’s an accounting guideline that requires assets or liabilities recorded at their initial acquired cost in financial statements.
Full Disclosure Principle
This concept requires that businesses firm to provide all necessary information to aid the person who is reading their’ financial statements understand and make an informed decision based on their financial report.
Going Concern Principle
It states that in preparing financial statements, the accountants assume the business will operate long enough to run in the future without the need to cut short its operations and thus not meeting its objective.
This principle requires that a company must record its expenses in the period in which the revenues were acquired.
Revenue Recognition Principle
This principle specifies the conditions on when to identify revenue and how the income should be accounted for in the course of financial transactions.
This principle encourages including only relevant information on a financial statement. It usually allows violation of other policies if need provided the effect is not significantly impacting results on the financial statement.
This principle aim is to ensure the reliability of the information provided by financial statements and advocates for immediate reporting of assets and liabilities
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