GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (G.A.A.P)
GAAP is an international convention of good accounting practices. It is based on the following core principles. In certain instances particular types of accountants that deviate from these principles can be held liable.
The Business Entity Concept
The business entity concept provides that the accounting for a business or organization be kept separate from the personal affairs of its owner, or from any other business or organization. This means that the owner of a business should not place any personal assets on the business balance sheet. The balance sheet of the business must reflect the financial position of the business alone. Also, when transactions of the business are recorded,
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If this is not done, the financial statements will not measure the results of operations fairly. The Cost Principle
The cost principle states that the accounting for purchases must be at their cost price. This is the figure that appears on the source document for the transaction in almost all cases. There is no place for guesswork or wishful thinking when accounting for purchases.
The value recorded in the accounts for an asset is not changed until later if the market value of the asset changes. It would take an entirely new transaction based on new objective evidence to change the original value of an asset.
There are times when the above type of objective evidence is not available. For example, a building could be received as a gift. In such a case, the transaction would be recorded at fair market value which must be determined by some independent means. The Consistency Principle
The consistency principle requires accountants to apply the same methods and procedures from period to period. When they change a method from one period to another they must explain the change clearly on the financial statements. The readers of financial statements have the right to assume that consistency has been applied if there is no statement to the contrary.
The consistency principle prevents people from changing methods for the sole purpose of manipulating figures on the financial statements. The Materiality Principle
The materiality principle requires
Basic financial statements are valuable documents in the management of health care organizations. Financial statements are helpful in the management of health care organizations and determination of their credit worthiness. Investors and other stakeholders also find the statements highly beneficial in determining the appropriateness for investment in the health care organization. Accepted accounting principles are conventions set to regulate formalized systems of accounting; especially applied in America. Set by the financial accounting and standards board, accepted accounting principles guide the preparation of basic financial statements in all organizations (Riahi-Belkaoui, 2004). The basic financial statements include the balance sheet, cash flow statement, statement of changes in the organization's assets and statements of operations. Health care organizations must adhere to generally accepted accounting principles that are relevant to their operations. Different accepted accounting principles are applicable to the management of health care organizations and preparation of financial documents. Since most health care organizations must conform to the auditing standards by CPA, they must use the various accepted accounting principles.
The AICPA published the generally accepted auditing standards (GAAS). GAAS are those guidelines which auditors must follow while conducting an audit of a company's financial statements. It must also be stated in the audit report that the audit was conducted following GAAS.
1) Determining whether amounts are in conformity with generally accepted accounting principles addresses the proper measurement of assets, liabilities, revenues, and expenses, which includes all of the following EXCEPT the
The last GAAP is the consistency principle. The consistency principle suggests that once an organization agrees upon the utilization of an accounting principle or method, they should consistently use the same method for future fiscal years. This will provide a more accurate comparison for the individuals dealing with the massive amounts of numbers and transactions each fiscal year.
One of the most important factors is reliability of financial statements. Reliability is further ensured by audit of financial statements. At last but not least, financial statements should be made in a comparable format either with previous periods or with the competitors.
Practicing accuracy end honesty will help continue the capacity to never misuse the financial systems, and abide by the laws laid out by GAAP. Organizations are providing their employees with the necessary training that will equip them as well as sustain the reporting practices operational but at the time use the similar procedures and
This accounting principle ensures comparability of any organization’s financial statements to any other organization in the same industry. Absence of this principle makes comparisons to other companies in the same industry difficult.
Representations are faithful if there is a correspondence or agreement between the accounting measures or descriptions in the financial reports and the economic phenomena they purport to represent (FASB, 1980: 6; FASB, 2005: 3). The difference between reliability and a faithful representation is ambiguous. Since the attributes neutrality, completeness and substance of economic phenomena (substance over form) can be classified as qualities of faithful representation, reliability becomes redundant. Consequently, a point of attention is to discuss what exactly the notions reliability and faithful representation mean and what they do not mean (FASB, 2005: 2-3).In both frameworks neutrality is defined as free from bias. 'To that end, the common conceptual framework should not include conservatism or prudence among the desirable qualitative characteristics of accounting information. However the framework should note the continuing need to be careful in the face of uncertainty' (FASB, 2005: 3).
Q. Which principle determines the amount initially entered into the records for purchases? a. Cost principle b. Going concern concept c. Business entity concept d. Objectivity concept ANS:
Consistency. When the company chooses the accounting method, it should continue using it throughout. It should be the same from period to period and year to year. If the company chooses to change the method, it should be disclosed and explained why the company made such a change. This concept can also be described as logical coherence among parts or things, when the same sequence is followed from one period to another.
Financial statement measures the financial performance, liquidity and strength of the firm, it is important
Accounting transactions are professional occasion that has either a positive or negative budgetary impact on the financial statements. One impact of transactions in a financial statement will increase or decrease the accounts contingent on the transaction that has taken place. The history of revenue that has come or gone from the business will be shown on both financial statements and accounting transactions. Many businesses make several transactions daily. Errors can have a negative impact on financial statements, because the facts come from the accounting transactions
GAAP is exceptionally useful because it attempts to regulate and normalize accounting definitions, assumptions, and methods. Because of generally accepted accounting principles one is able to presuppose that there is uniformity from year to year in the methods that are used to prepare a
Cost accounting is concerned with cost and therefore is necessary to understand the meaning of term cost in a proper perspective.
The reliability principle is the concept of only recording those transactions in the accounting system that you can verify with objective evidence( Reliability principal, 2015). This evidence is stated as checks, receipts, bank statements, purchase orders and anything which can prove the transactions actually happened. It is key to consider gathering documents and information from customers, vendors and external forces as they can help validate your businesses own documentation. This principal is crucial to help elevate potential misunderstood transaction and provide accurate information to the powers at be.