A brief description of GAAPs

Generally Accepted Accounting

Principles
GAAPs

• Generally Accepted Accounting Principles

– Financial accounting practice is governed by a set of

rules and concepts accountants have to follow to deliver
information that is

Relevant Reliable Comparable

Is helpful in contrasting
Affects the decision of its organisations (company
Is trusted by users
user over time or other
companies).

Wild, Larson, Chiappeta« Financial accounting fundamentals » 2nd edition MacGraw-Hill Irwin
GAAPs

• Accounting guidelines

– Accounting guidelines are classified as:

• assumptions - provide the foundation for the accounting
process
• principles - indicate how transactions should be recorded
• constraints - reduce the application of principles under certain
limits.

– We will focus on the time-period assumption, revenue

recognition, the matching and the historic cost
principles during the course.
GAAPs

• Accounting guidelines
Time-period
+ Assumptions Principles Constraints
Revenue recognition
+
Business or
Matching separate Historical cost Materiality
= entity

Accrual basis
of accounting Going
Matching Cost benefit
concern

the effects of the

transactions are Monetary unit
or
Revenue Conservatism
recorded as the measurement
recognition or prudence

transactions occur
Time period
Full Industry
or accounting
disclosure practice
periodicity
GAAPs

• Accounting rules - assumptions

Business or • Accounting for a business is kept separate from the
separate entity personal affairs of its owner.

Going concern • Assumes that a business will continue to operate in a

foreseeable future; business continuous as usual

Money unit or • Only items that can be measured in financial terms

measurement (€,$,£,¥,..) are included in the accounts. One currency.

• The period of time selected for reporting results of

Time period operations (Income Statement) and changes in financial
position (Balance Sheet); at least once a 1 year.
GAAPs

• Accounting rules - principles and conventions

Historic cost or • Requires transactions to be recorded at the price ruling at the time,
and for assets to be valued at their original cost. Some
cost principle significant exceptions.

• Expenses are recognised in the same period in which the

Matching revenues they helped produce are recorded. Reason is to
determine the right level of profit

Revenue • Revenues are recognised when earned and realised or

recognition realisable.

Materiality • The increased benefit of increased accuracy should out weigh the
cost of achieving the increased accuracy. .

Conservatism or • Accounting follows the rule "anticipate no profit and provide

for all possible losses”; make judgments and estimates that
prudence lower profits and assets valuations.