Generally Accepted Accounting Principles

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Generally Accepted Accounting Principles (GAAP) is the standard framework of guidelines for financial accounting. It includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements.

1 Overview
2 United States' GAAP Hierarchy
3 National GAAP
4 Required Departures from GAAP
5 International GAAP
6 See also
7 External links

[edit] Overview

Financial accounting information must be assembled and reported objectively. Third-parties who must rely on such information have a right to be assured that the data are free from bias and inconsistency, whether deliberate or not. For this reason, financial accounting relies on certain standards or guides that are called "General Accepted Accounting Principles" (GAAP).

Principles also derive from tradition, such as the concept of matching. In any report of financial statements (audit, compilation, review, etc.), the preparer/auditor/CPA must indicate to the reader whether or not the information contained within the statements complies with GAAP.

[edit] Principle of regularity

Regularity can be defined as conformity to enforced rules and laws. This principle is also known as Principle of Consistency.

[edit] Principle of sincerity

According to this principle, the accounting unit should reflect in good faith the reality of the company's financial status..

[edit] Principle of the permanence of methods

This principle aims at allowing the coherence and comparison of the financial information published by the company.

[edit] Principle of non-compensation

One should show the full details of the financial information and not seek to compensate a debt with an asset, a revenue with an expense, etc.

[edit] Principle of prudence

This principle aims at showing the reality "as is" : one should not try to make things look prettier than they are. Typically, a revenue should be recorded only when it is certain and a provision should be entered for an expense which is probable.

[edit] Principle of continuity

When stating financial information, one should assume that the business will not be interrupted. This principle is mitigating the previous one about prudence: assets do not have to be accounted at their disposable value, but it is accepted that they are at their historical value (see depreciation).

[edit] Principle of periodicity

Each accounting entry should be allocated to a given period, and split accordingly if it covers several periods. If a client pre-pays a subscription (or lease, etc.), the given revenue should be split to the entire time-span and not counted for entirely on the date of the transaction.

[edit] United States' GAAP Hierarchy

In the United States, GAAP derives, in order of importance, from:

issuances from an authoritative body designated by the American Institute of Certified Public Accountants(AICPA) Council (for example, the Financial Accounting Standards Board Statements, AICPA Accounting Principles Board Options, and AICPA Accounting Research Bulletins);
other AICPA issuances such as AICPA Industry Guides;
industry practice; and
into para-accounting literature in the form of books and articles.

	House of GAAP
Category (a) (Most authoritative)	FASB Standards and Interpretations	Accounting Principles Board (APB) Opinions		AICPA Accounting Research Bulletins (ARBs)
Category (b)	FASB Technical Bulletins	AICPA Industry Audit and Accounting Guides		AICPA Statements of Position (SOPs)
Category (c)	FASB Emerging Issues Task Force (EITF)		AICPA AcSEC Practice Bulletins
Category (d) (Least authoritative)	AICPA Accounting Interpretations	FASB Implementation Guides (Q and A)		Widely recognized and prevalent industry practices

Category A and B are considered authoritative. Category C and D are considered marginally authoritative, thoughts on interesting and unique issues, but could be invalid given a large level of materialism. Category C and D are considered a talking and reasoning phase of bringing issues to an authoritatize level of GAAP.

[edit] National GAAP

Every country has its own version of GAAP with standards set by a national governing body.

[edit] Required Departures from GAAP

Under the AICPA's Code of Professional Ethics under Rule 203 - Accounting Principles, a member must depart from GAAP if following it would lead to a material misstatement on the financial statements, or otherwise be misleading. In the departure the member must disclose, if practicable, the reasons why compliance with the accounting principle would result in a misleading financial statement. Under Rule 203-1-Departures from Established Accounting Principles, the departures are rare, and usually take place when there is new legislation, the evolution of new forms of business transactions, an unusual degree of materiality, or the existence of conflicting industry practices. This is taken from the Page 56 in the auditing textbook "Auditing, an integrated approach" by Alvin Arens and James Loebbecke, published in 1980 by Prentise Hall, ISBN 0-13-051656-2.