Forums Accounting What is GAAP?

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    What is GAAP?


    Our accounting profession highly relies upon accounting principles or GAAP, to regulate the accounting standards of US. GAAP stands for generally accepted accounting principles. The primary purpose of GAAP is to provide insights into accounts while preparing financial statements. The idea behind generally accepted accounting principles is to keep requirements equal for all businesses and adopt uniformity and consistency in the field of accounting. There are various types of accounting principles.

    Some of these accounting principles are:

    • Accrual principle– This principle states that accounting transactions should be recorded in the accounting period when they actually occur irrespective of the cash flow associative with them.
    • Conservatism principle: According to this principle, it is believed that expenses and losses must be considered first and then all profits and gains.
    • Full disclosure principle: This principle states that all the information related to business transactions which may affect reader’s understanding of that financial statement must be disclosed.
    • Matching principle: According to this principle, when you record revenue, you should record all related expenses at the same time. For example: while purchasing inventory we must deduct the amount at the time of recording inventories.

    Without GAAP, companies wouldn’t hold to a strict set of standards, which means they’d have a lot more leeway in deciding what information they choose to share or keep hidden. GAAP therefore serves the very important function of making sure companies and organizations can’t “cheat” on their financial reporting.

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