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Discussion on: Explain the meaning of generally accepted Accounting Principles and define and apply the several key principles

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General Accepted Accounting principal is a framework of accounting, standard, rules, and procedures define by the professional accounting industry, which has been adopted by nearly all publicly traded U.S Companies (Kotharia & Karthik, 2010). Basically, it is a uniform set of principles, rules, procedure, standards, and guidelines of financial accounting and reporting. The major role of GAAP are

  1. It must be used in the preparation of accounting records and financial statements.

  2. It must be complied with in order to obtain an unqualified opinion from independent auditors.

  3. It must be complied with for securities to be listed on a stock exchange and to issue a new security.

The following is a list of the main Accounting Principle and Guidelines:

Economic Entity Assumption : The accountant keeps all of the business transactions of a sole proprietorship separate from the business owner’s personal transactions. For legal purposes, a sole proprietorship and its owner are considered to be one entity, but for accounting purposes, they are considered to be two separate entities.

Monetary unit assumption: An economic entity’s accounting records include only quantifiable transactions. Certain economic events that affect a company, such as hiring a new General Manager or introducing a new product, cannot be easily quantified in monetary units and, therefore, do not appear in the company’s accounting records. Furthermore, accounting records must be recorded using a stable currency.

Accrual basis accounting: In most cases, GAAP requires the use of accrual basis accounting rather than cash basis accounting. The accrual basis of accounting is generally accepted as providing a more appropriate record of all of an entities transactions over a given period of time than the cash basis or another comprehensive basis of accounting. The cash basis does not result in a presentation of financial information in conformity with GAAP (Mackintosh, 1993). Accordingly, financial statements of public broadcasting entities represented, as being in conformity with GAAP must be prepared using the accrual basis of accounting.

Cost Principle : The cost principle requires one to initially record an asset, liability, or equity investment at its original acquisition cost. The principle is widely used to record transactions, partially because it is easiest to use the original purchase price as objective and verifiable evidence of value. A variation on the concept is to allow the recorded cost of an asset to be lower than its original cost if the market value of the asset is lower than the original cost. However, this variation does not allow the reverse - to revalue an asset upward. Thus, this lower of cost or market concept is a crushingly conservative view of the cost principle.

Full Disclosure Principle : The full disclosure principle states that you should include in an entity’s financial statements all information that would affect a reader’s understanding of those statements. The interpretation of this principle is highly judgmental since the amount of information that can be provided is potentially massive. To reduce the amount of disclosure, it is customary to only disclose information about events that are likely to have a material impact on the entity’s financial position or financial results. Details of contingent liabilities, contingent assets, legal proceedings, etc. are also relevant to the decision making of users and hence need to be disclosed.

Matching Principle: The matching principle is associated with the accrual method of accounting and adjusting entries.

Materiality principle: Accountants follow the materiality principle, which states that the requirements of any accounting principle may be ignored when there is no effect on the users of financial information. Certainly, tracking individual paper clips or pieces of paper is immaterial and excessively burdensome to any company’s accounting department (Ball, 2009).

Accountants use generally accepted accounting principles (GAAP) to guide us in recording and reporting financial information. GAAP comprises a broad set of principles that have been developed by the accounting profession and the Securities and Exchange Commission (SEC) (Wayne, 2007).

References
Ball, R. 2. (2009). Market and political/regulatory perspectives on the recent accounting scandals. Journal of Accounting Research 47 , 247-251.

Kotharia, S., & Karthik, R. (2010). Implications for GAAP from an analysis of positive research in accounting. Journal of Accounting and Economics , 247-250.

Mackintosh, I. (1993). Accrual Accounting for Departments and the Whole of Government: Costs, Benefits, and Opportunities. Australian Society of Certified Practising Accountants .

Wayne, R. L. (2007). International Accounting Standards and Accounting Quality. SSRN Electronic Journal 46 .