Principle of non-compensation: One should show the full details of the financial information and not seek to compensate a debt with an asset, revenue with an expense, etc.Principle of the permanence of methods: This principle aims at allowing the coherence and comparison of the financial information published by the company.Principle of sincerity: According to this principle, the accounting unit should reflect in good faith the reality of the company's financial status.Principle of consistency: This principle states that when a business has once fixed a method for the accounting treatment of an item, it will enter all similar items that follow in exactly the same way.Principle of regularity: Regularity can be defined as conformity to enforced rules and laws.In any report of financial statements (audit, compilation, review, etc.), the preparer/auditor must indicate to the reader whether or not the information contained within the statements complies with GAAP. Principles derive from tradition, such as the concept of matching. The move towards International Standards seeks to eliminate this kind of disparity. While there is tremendous similarity between GAAP and the international rules, the differences can lead a financial statement user to incorrectly believe that company A made more money than company B simply because they report using different rules. GAAP applies only to United States financial reporting and thus an American company reporting under GAAP might show different results if it was compared to a British company that uses the International Standards. GAAP is slowly being phased out in favor of the International Financial Reporting Standards (IFRS) as the global business becomes more pervasive. The study of accounting, in large part, entails learning the many rules and promulgations set forth by FASB and how to apply those rules to actual business events. Nonetheless, since all companies report using the same set of rules, knowing the rules of GAAP reporting can tell the user of financial statements a great deal. ![]() While generally neutral, there is some pressure on the FASB to yield to industry or political pressure when it makes its rules. value of a foreclosed home loan), the effect on a bank's "net worth" as defined by GAAP can change dramatically. For example, when FASB stopped requiring banks to mark their assets (loans) to the lower of cost or market (i.e. Changes in the GAAP rules can carry tremendous impact upon American business. The more recent pronouncements come as Statements of the Financial Accounting Standards (SFAS). The various rules and pronouncements come from the Financial Accounting Standards Board (FASB) which is a non-profit organization that the accounting profession has created to promulgate the rules of GAAP reporting and to amend the rules of GAAP reporting as occasion requires. By using consistent principles, all companies reporting under GAAP report these transactions on their financial statements in a consistent manner. Currently there are more than 150 "pronouncements" as to how to account for different types of transactions, ranging from how to report regular income from the sale of goods, and its related inventory values, to accounting for incentive stock option distributions. The rules and procedures for reporting under GAAP are complex and have developed over a long period of time. Thus, if company A reports $1,000,000 of net income, using GAAP, then the public and other users of financial statements can compare that net income to another company that is reporting $500,000 of net income, using GAAP. This allows for an "apples to apples" comparison of any corporation or business entity with another. This provides for consistency in the reporting of companies and businesses so that financial analysts, banks, shareholders and the SEC(Securities & Exchange Commission) can have all reporting companies preparing their financial statements using the same rules and reporting procedures. ![]() When preparing financial statements using GAAP, most American corporations and other business entities use the many rules of how to report business transactions based upon the various GAAP rules. The basic principles underlying GAAP accounting are set forth below. GAAP is not a single accounting rule, but rather the aggregate of many rules on how to account for various transactions. GAAP is a codification of how CPA firms and corporations prepare and present their business income and expense, assets and liabilities on their financial statements. The term "GAAP" is an abbreviation for Generally Accepted Accounting Principles (GAAP). It has been suggested that this article or section be merged into Generally Accepted Accounting Principles (United States).
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