Generally Accepted Accounting Principles
Generally Accepted Accounting Principles (GAAP) are a set of accounting standards, conventions, and rules used as the basis for financial accounting in a country. GAAP encompasses the procedures and guidelines companies must follow when compiling their financial statements. While GAAP varies from one jurisdiction to another, there are common underlying principles that are universally applied. These standards aim to improve the clarity, consistency, and comparability of the communication of financial information.
Core Principles
GAAP is based on a core set of principles that guide the recording and reporting of financial information. These include:
-
Consistency: Financial data should be presented consistently over time to allow users to make meaningful comparisons.
-
Relevance: Information must be relevant to the decision-making needs of users.
-
Reliability: Financial statements should be error-free and free from bias.
-
Comparability: Users should be able to compare the financial statements of different entities.
-
Understandability: Information should be presented clearly and concisely.
Components of GAAP
GAAP in the United States is established by the Financial Accounting Standards Board. Some of the primary components of GAAP include:
-
Accrual Accounting: Revenues and expenses are recorded when they are earned or incurred, not when cash is exchanged.
-
Revenue Recognition Principle: Revenue is recognized when it is earned and realizable.
-
Matching Principle: Expenses should be matched with the revenues they help to generate.
-
Full Disclosure: All information that affects the full understanding of a company's financial statements must be included with the statements.
GAAP Around the World
Different countries have their own versions of GAAP, tailored to their regulatory environments:
-
United States: GAAP is governed by the Financial Accounting Standards Board and the Accounting Standards Codification.
-
United Kingdom: Known as the Generally Accepted Accounting Practice (UK), which aligns with European directives.
-
Canada: Previously followed Canadian GAAP, which has been largely subsumed under International Financial Reporting Standards (IFRS).
-
France: Operates under a system called Plan Comptable Général (PCG), providing specific guidance for financial reporting.
-
India: Uses Indian Accounting Standards, which are aligned with IFRS.
Relationship with International Standards
GAAP in many countries is increasingly being influenced by International Financial Reporting Standards, issued by the International Accounting Standards Board. These standards aim for a single set of high-quality, understandable, and enforceable global accounting standards. The International Public Sector Accounting Standards also work towards consistency in public sector accounting globally.