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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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ShantaMilan

There are various methods of accounting. Some companies keep accounts on accrual basis while other keep it on cash basis. Getting into more detail companies record inventory in either LIFO or FIFO method. Similarly long term lease, depreciation etc. can be recorded differently as per companies need and requirement. Therefore to analyze the final reports of two similar companies a financial analyst must understand the accounting system differences before comparing them. To overcome these differences, there are set principle to prepare, book and report a company’s financial position. These are called generally accepted accounting principles (GAAP). In the United States, the GAAP is known as Standards Board issues Statements of Financial Accounting Standards (SFAS), which describe accounting rules that companies must follow in preparing their financial statements. (Moyer, McGuigan, Rao, & Kretlow, 2012, p. 94) Similarly IFRS or International Financial Reporting Standard, is another GAAP followed.

Listed below are some of the basic principles of GAAP

Specific currency principle
The financial statement of a company will be shown in a common currency. For example, the financial statement of Nepali organization will be shown in Nepali rupees and not in foreign exchange. Even foreign currency will be converted into Nepali currency and shown in the report.

Specific time period principle
A financial statement is done for a specific period. This helps the reader to understand what period the report represents. For example, in Nepal the fiscal year starts on the first day of Shrawan and ends on the last day of Ashar. This roughly reflects start date of 16 July to 15 July in English calendar.

Full disclosure principle
This principle dictates that all the functioning in the financial statements should be shown and nothing should be hidden. This helps reduce the possibility of fraud. For example, hidden accounts cannot be maintained and all sources of funds and its applications must be clearly shown.

The recognition principle
This principle explain that a company should show income and expenditure at the same time they are done. Revenue of the next fiscal year cannot be shown in this year report and this year’s expenses cannot be shown in the next period.

These are some of the principle mandated and followed by the generally accepted accounting principle.

Reference

Moyer, C. R., McGuigan, J. R., Rao, R., & Kretlow, W. J. (2012). Contemporary Financial Management. Natorp Boulevard: South-Western, Cengage Learning.