GAAP

To understand GAAP, you need to understand its basics.

If you have a good understanding of basic accounting principles, you can understand GAAP. This paper describes five key accounting principles.

Economic Agent Assumption

According to this principle, auditors separate business and personal transactions in the sense of sole proprietorships. In situations where a business is considered legal, the sole proprietor and his owner are grouped together as one entity for him. However, accounting considers both separately rather than as a whole.

Adopting Monetary Units

Economic activities typically have a defined currency (such as the US dollar) as a unit of measure. This makes sure that each transaction recording is made in a given currency. This is a basic accounting principle that assumes that the purchasing power of the dollar remains constant over time. Because of this, accountants ignore the effects of inflations on the transactions recorded.

Time Period Assumption

The assumption in this principle is that the possibility of complex reporting and ongoing business activities can be in relatively short and distinct time intervals. If the time intervals are shorter, than the accountants will be required to provide the amounts in relation to that period as fast as possible. It is important that in each income statement to have a heading of the time interval. Other documents that should have the time interval as the heading include; cash flows statement and stockholder’s equity statement.

Cost Principle

Cost refers to the amount of money spent when a good was first obtained. Whether the purchase was within the last two days or after a decade, it will still be referred to as a cost. This makes the amounts that are recorded on financial statements to be stated as historical cost amounts. This accounting principle bans the adjustment of asset costs due to inflations. A summary of the rule of this principle is that; there is no adjustment of any asset amount to make it fit in an increased value.

Full Disclosure Principle

An important information to the lender or investor that are in the financial statement should be disclosed within or in the statement. The information should be in notes, like the footnotes found attached to financial statements.