Generally Accepted Accounting Principles

The stock market crash of 1929 and the Great Depression are the reasons behind establishing the Generally Accepted Accounting Principles. Generally Accepted Accounting Principles were established in compliance with the regulations, including the Securities Act of 1933 and the Securities Exchange Act of 1934.

To make the financial reporting standardised and transparent, GAAP is used with the help of generally accepted accounting methods and practices and procedures. The usage of GAAP gives consistent results in the presentation of financial reports, making it smooth for investors and other interested parties to examine and compare the financial statements with that of other corporations.

These essential principles encompass the details, difficulties, and legality of business and corporate accounting. GAAP is used by the Financial Accounting Standards Board (FASB) as a base for its complete set of accepted accounting principles and practices.

GAAP Principles

Principle of Regularity 

GAAP accountants follow adopted policies and regulations consistently to prepare financial statements.

Principle of Consistency 

GAAP practices are consistently followed throughout the reporting process.

Principle of Sincerity 

Accountants follow GAAP sincerely for accuracy and impartial results.

Principle of Permanence of Methods 

Accountants use consistent procedures for financial reporting so that it can be compared from one period to another. 

Principle of Non-compensation 

Organisational performance is provided by the accountants without any hope of compensation, whether the financial statements look positive or negative.

Principle of Prudence 

It anticipates all losses, and any changes or speculation does not affect the process of financial reporting.

Principle of Continuity 

Any valuation of assets or any other major activity cannot affect the process of financial reporting.

Principle of Periodicity 

The financial data are collected, organised, and reported from time to time according to the relevant accounting periods

Principle of Materiality 

The principle of materiality states that the financial and accounting details should be correctly disclosed by the accountants.

Principle of Utmost Good faith 

The data disclosed by the accountant should give a true and fair view of the organisation’s financial condition.

Accounting Principles

GAAP includes three parts that remove deceptive accounting practices ten accounting principles, FASB rules and standards, and common accounting practices and procedures. This enables the creation of consistent accounting and financial reporting that provides the interested parties with the required information to compare the results of one organisation with another based on the financial conditions. Without GAAP, accountants can use dishonest techniques to paint the organisation as a deceptive organisation.

GAAP Consists of Three Basic Accounting Principles

The ten GAAP recommendation differentiates one organisation’s activities from those of non-public organisations that do not follow GAAP. It depicts the length of time covered by the specific review methods. These companies depend on special practices governing costs, disclosures, revenue recognition, savings, etc.

Utility of Financial Analysis

It is significant for a financial analyst to have strong expertise in accounting principles and practices for calculating valuation and financial modelling.

What Are The Alternatives to GAAP?

In the US, organisations use GAAP, whereas, outside the US, most companies follow IFRS, which is the International financial reporting standard (IFRS). IFRS is regulated by the International Accounting Standards Board (IASB).GAAP and IFRS cover valuable principles and regulations; hence efforts are being made to merge both these standards.

Few Organisations assume that the GAAP does not represent the true picture of the organisations. Therefore they have chosen not to follow the GAAP principles. These companies are called non-GAAP reporting companies. 

These companies disclose in-depth information about the financial performance of the business as they focus on every detailed statistic of the organisation. But sometimes, non-GAAP reporting financial results can lead to confusion for the interested parties.

GAAP is not global accounting standards and practices, which creates a challenge for the rest of the companies outside the United States. Therefore, given this challenge, IFRS has been established as a common set of standards outside the US. IFRS is being used in countries such as the European Union, Australia, Canada, Japan, India, and Singapore.

Introduction to IFRS

International Financial Reporting Standards (IFRS) was introduced 50 years ago. The board of the International Accounting Standards Committee (IASC) established a sequence of International Accounting Standards (IAS) for the development of consistent accounting practices and methods in the year 1973.

The International Accounting Standards Board (IASB) felt the need to publish IFRS for a creation of a uniform standard outside the US. Therefore, in 2001, IASB started releasing IFRS, including in the US.

To move towards easy financial reporting and practices, FASB realised the importance of the development of IFRS.

Conclusion

To make financial reporting consistent and transparent, GAAP is introduced. GAAP is used by international organisations like FASB, which use GAAP as its base for the setting of accounting principles and practices. To move towards easy financial reporting and practices, FASB realised the importance of the development of IFRS.