Generally accepted accounting principles (GAAP) is a setup in place for a safe, efficient and fair transaction. It includes a common set of accounting principles, standards, and procedures with which the company must comply while creating/maintaining their book of account (Fisher, 2011).
There are several principles under GAAP of which few of key ones along with their application are as listed below:
Monetary Unit Assumption states that anything which is to be recorded in the financial statement/report should also be expressed in monitory value. Only those transactions which are expressed in the same currency as of the economic activity is recorded. The result of this accounting practice is that the purchasing power of the currency is considered to be constant over time disregarding inflation. For example, Nepalese rupee from transactions in 1990 is shown along with the dollars from the transactions from 2018.
Full Disclosure Principle states that the stakeholder should be aware of all the information that is important. Thus the business should disclose those documents to the stakeholders. That ensures that the stakeholders are informed about the company and can make decision-based on it. A business follows through it by providing financial statements, notes to it and further supplementary information (Korn & Schiller, 2003). For example, if the organization is facing a lawsuit of whose result doesn’t go in favor of the company, it will require to pay off a significant amount of money out. While preparing financial statement the final verdict of the lawsuit can’t be known so as part of the full disclosure, this lawsuit should be listed in the notes section of the financial statement.
Time Period Assumption also known as periodicity assumption. It involves of artificially dividing the economic life of the business. These divisions made based on artificial time period is usually of a month, quarter, and year. Through the use of the assumption, a firm’s periodic positioning can be understood to formulate strategies and make changes to the strategies as per the need.
Economic Entity Assumption states that the business owner’s personal transactions need to be kept separately from all other business transactions. It is an accounting principle so is different from legal which consider the business as a whole instead of separating the owner and the rest. This principle enables the business to have on its own name assets and liabilities.
Matching Principle as per its name requires matching between the revenue and the related expense. It allows real-time analysis of the records i.e. revenue and expense. An example of this could be that the inventory of the business would simply be considered as an asset and not expense until it’s sold in the balance sheet. When sold, the cost of goods is recorded along with the revenue from it.
References
Fisher, S. (2011). Measuring The Evolution Of Generally Accepted Accounting Principles. Journal Of Applied Business Research (JABR) , 14 (3), 105.
Korn, E., & Schiller, U. (2003). Voluntary Disclosure of Nonproprietary Information: A Complete Equilibrium Characterization. Journal Of Business Finance & Accounting , 30 (9-10), 1327-1339.
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Generally accepted accounting principles (GAAP) is a setup in place for a safe, efficient and fair transaction. It includes a common set of accounting principles, standards, and procedures with which the company must comply while creating/maintaining their book of account (Fisher, 2011).
There are several principles under GAAP of which few of key ones along with their application are as listed below:
Monetary Unit Assumption states that anything which is to be recorded in the financial statement/report should also be expressed in monitory value. Only those transactions which are expressed in the same currency as of the economic activity is recorded. The result of this accounting practice is that the purchasing power of the currency is considered to be constant over time disregarding inflation. For example, Nepalese rupee from transactions in 1990 is shown along with the dollars from the transactions from 2018.
Full Disclosure Principle states that the stakeholder should be aware of all the information that is important. Thus the business should disclose those documents to the stakeholders. That ensures that the stakeholders are informed about the company and can make decision-based on it. A business follows through it by providing financial statements, notes to it and further supplementary information (Korn & Schiller, 2003). For example, if the organization is facing a lawsuit of whose result doesn’t go in favor of the company, it will require to pay off a significant amount of money out. While preparing financial statement the final verdict of the lawsuit can’t be known so as part of the full disclosure, this lawsuit should be listed in the notes section of the financial statement.
Time Period Assumption also known as periodicity assumption. It involves of artificially dividing the economic life of the business. These divisions made based on artificial time period is usually of a month, quarter, and year. Through the use of the assumption, a firm’s periodic positioning can be understood to formulate strategies and make changes to the strategies as per the need.
Economic Entity Assumption states that the business owner’s personal transactions need to be kept separately from all other business transactions. It is an accounting principle so is different from legal which consider the business as a whole instead of separating the owner and the rest. This principle enables the business to have on its own name assets and liabilities.
Matching Principle as per its name requires matching between the revenue and the related expense. It allows real-time analysis of the records i.e. revenue and expense. An example of this could be that the inventory of the business would simply be considered as an asset and not expense until it’s sold in the balance sheet. When sold, the cost of goods is recorded along with the revenue from it.
References
Fisher, S. (2011). Measuring The Evolution Of Generally Accepted Accounting Principles. Journal Of Applied Business Research (JABR) , 14 (3), 105.
Korn, E., & Schiller, U. (2003). Voluntary Disclosure of Nonproprietary Information: A Complete Equilibrium Characterization. Journal Of Business Finance & Accounting , 30 (9-10), 1327-1339.