GAAP (GENERALLY ACCEPTED ACCOUNTING PRINCIPLES)

• The common set of accounting principles, standards and procedures.

• Combination of authority standard (set by policy boards) and simply, the commonly accepted ways.

• Rules that govern how accountants measure, process and communicate financial information.

• GAAP refers to a specific set of guidelines that have been established to help publicly-traded companies create their financial statements. Publicly-traded companies are companies that have made stock in their organization available for sale to the public.

• Ensure that consistent accounting procedures are followed in recording the events created by business transactions and in preparing financial statements.

GAAP Basics

The generally accepted accounting principals are based on the basic tenets of accounting:1. Four basic assumptions2. Principles of accounting3. Four constraints

1.The Four Basic Assumptions of Accounting

1. Separate Entity: The company is treated as a separate economic entity for accounting purposes, even if it isn't a separate legal entity.

2. Monetary Unit: The only business transactions recorded are those in financial terms (For example :In rupee in India).

3. Time Period: Financial reports cover a specific period of time.4. Going concern: Financial reporting assumes, unless otherwise

known, that the business will continue operating indefinitely

2.The Principles of Accounting

1. Historical Cost: Initial recording of financial transactions must be at their original cash equivalent cost.

2. Full Disclosure: Financial statements contain enough information that they are not misleading.

3. Revenue Recognition: A company records revenue in the accounting period when services are completed or goods are delivered to the customer, not when the customer makes payment.

Cntd.4. Matching : The matching principle  requires that revenues and any related expenses be recognized together in the same period.5. Economic entity assumption: means that any activities of a business must be kept separate from the activities of the business owner.6.Monetary unit assumption: means that only activities that can be expressed in rupee amounts can be included in accounting records.

Cntd.. 7.Time period assumption: means that business activities can be reported in distinct time intervals. These intervals generally was a financial year i.e. 12 months.

8. Going concern principle: refers to the intent of a business to continue operations into the foreseeable future and not to liquidate the business.

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9.Consistency principle: The consistency principle states that, once you adopt an accounting principle or method, continue to follow it consistently in future accounting periods. Only change an accounting principle or method if the new method in some way improves financial results.

3.The Four Constraints of Accounting

1. Materiality: The point of the materiality principle is that if an amount or transaction is immaterial in the grand scheme of the company, then it may not need to be treated in the same manner as material transactions.

2. Conservatism: If a company could equally use more than one accounting method, the company should use the one that affects the financial statements in the least favorable immediate way.

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3. Cost-Benefit : Cost-benefit analysis compares the outflows of resources needed to create additional inflows of resources. The benefits should outweigh the costs.

4. Industry Practice : Some industries have unique requirements, and companies in those industries can follow standard industry practices.

Why GAAP to be followed

• GAAP specifications include definitions of concepts and principles, as well as industry-specific rules. The purpose of GAAP is to ensure that financial reporting is transparent and consistent from one organization to another.

• GAAP is set with the objective of providing information that is useful to investors, lenders, or others that provide or may potentially provide resources to a company or not-for-profit organization. 

INTERNATIONAL ACCOUNTING STANDARDS (IAS)

• International Accounting standard are accounting standards issued by the International Accounting standards board(IASB).

• Listed companies , and sometimes unlisted companies are required to use the standards in their financial statements in those countries which have adopted them.

International accounting standard is the international aspects of accounting, including such matters as accounting principles and reporting practices in different countries and their classification ; patterns of accounting development , foreign currency translation; foreign exchange risk; international comparisons of consolidations accounting and inflation accounting.

What Are the Benefits of International Accounting Standards?

1. Improved Flow of CapitalInternational Financial Reporting Standards, or IFRS, facilitates the convergence and transparency of accounting practices. This boosts the flow of capital across the international markets. Investors and other stakeholders find it more convenient to compare their business performance with other international companies.

2. Globalized Orientation

Financial reports become automatically acceptable in IFRS-compliant countries, and companies don't need to prepare alternative sets of financial statements when pursuing business interests in these countries. This reduces a business's costs of preparing financial statements destined for international audiences.

3.Generalized Standard-Setting

IFRS stipulations are flexible to both expected and unexpected changes in the global business environment because they are based on broad principles. The generalized stipulations are designed to be applicable and accommodative to varying jurisdictional circumstances and traditions, with minimal interventions of the IASB.

4.Enhanced Financial Reporting

The use of IFRS enhances the quality of financial reports because it leaves little room for undermining the objectives of the set standards. This is unlike country-specific accounting rules that are susceptible to circumventions. Quality financial reports boost investor confidence in a business.