How To Guide For: Understanding GAAP ---How It Works & How It Affects Financial Reporting

GAAP (generally accepted accounting principles) is a collection of commonly-followed accounting rules and standards for financial reporting. GAAP specifications include definitions of concepts and principles, as well as industry-specific rules. GAAP is implemented through measurement principles and disclosure principles. Measurement principles recognize and determine the timing and basis of items that enter the accounting cycle and impact the financial statements, such as the period in which transactions will be recorded. Disclosure principles determine what specific numbers and other information are essential to be presented in financial statements. Since financial statements prepared under GAAP are intended to reflect an economic reality, GAAP makes a company's financials comparable and understandable so that investors and creditors can make rational investment, credit and other financial decisions. GAAP requires information on financial statements to be relevant, reliable, comparable and consistent. GAAP is made up of 10 basic accounting principles. They are Economic Entity Assumption (which states that businesses must keep their transactions separate from transactions of their owners, business units or other businesses), Monetary Unit Assumption (which assumes business transactions or events can be measured and expressed in terms of monetary units and the monetary units are stable and dependable), Timer Period Assumption (Also known as the periodicity assumption. Is the accounting guideline that allows the accountant to divide up the complex, ongoing activities of a business into periods of a year, quarter, month, week, etc), Cost Principle (requires that assets be recorded at the cash amount --or its equivalent at the time that an asset is acquired), Full Disclosure Principle (requires a company to provide the necessary information so that people who are accustomed to reading financial information can make informed decisions concerning the company), Going Concern Principle (is the assumption that an entity will remain in business for the foreseeable future), Matching Principle (states that expenses should be recorded during the period in which they are incurred, regardless of when the transfer of cash occurs), Revenue Recognition Principle (states that revenue should be recorded when it has been earned), Materiality (is the threshold above which missing or incorrect information in financial statements is considered to have an impact on the decision making of users), Conservatism (is a policy of anticipating possible future losses but not future gains). To get more in depth information on GAAP, how it works and how it affects financial reporting click on the pictures below to read the articles.