GAAP Full Form, Importance & Essential Principles

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GAAP Full Form, Importance & Essential Principles

GAAP full form is Generally Accepted Accounting Principles. These principles are generally accepted accounting principles that play an important role in financial reporting practices in the U.S. In this blog post, we shall explain what GAAP is, its importance and essential GAAP principles.

What is GAAP Full Form?

GAAP full form is Generally Accepted Accounting Principles. In the U.S., GAAP are a collection of rules, standards and practices that guide how financial info should be recorded and reported by the companies. All the public companies in the United States are required to follow these principles while preparing their financial statements. GAAP is also widely applied in governmental accounting. 

Two main bodies are responsible for creating and updating them. These bodies are the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB). FASB creates and updates GAAP for the private sector entities. GASB, on the other hand, sets GAAP for state and local government entities. 

The purpose of GAAP is to bring consistency, accuracy and transparency to financial reporting across several industries. In India, the financial statements are prepared in accordance with the accounting standards released by the Institute of Chartered Accountants of India (ICAI).

Importance of GAAP

To maintain trust and preserve confidence in the financial market, GAAP principles are essential. Without these principles, the investors might feel less inclined to trust the information that public companies provide to them. The lack of trust could lead to lesser investments and higher transaction costs. In the long run, this could weaken the economy.

GAAP allows investors to do a comparison between companies on a level playing field. It makes “apples-to-apples” comparisons possible by ensuring consistency in financial reporting. As a result, the investors can conduct analysis on the businesses more accurately and make informed decisions.

Essential GAAP Principles

Some essential GAAP principles are provided below:

• Principle of Conservatism: It guides accountants to use high levels of caution and diligence during data verification and at the time of preparing entries and documents, especially in cases that involve uncertainty.

• Principle of Utmost Good Faith: It is also known as Principle of Honesty. It states that all businesses and accountants must be entirely honest and forthcoming in their financial recording as well as reporting.

• Principle of Materiality: This principle determines whether a discrepancy, like an omission or misstatement, would impact the decision-making of a reasonable user.

• Principle of Regularity: This principle states the GAAP compliant accountants must strictly follow the established rules as well as regulations.

• Principle of Consistency: This principle requires the accounting methods and policies to be applied uniformly and continuously throughout the financial reporting process. It ensures that financial statements are comparable and reliable for decision-making.

• Principle of Non-Compensation: According to this principle, all the aspects of an organization’s performance, whether positive or negative, are to be fully reported with no prospect of debt compensation. It makes sure that the company’s financial statements give a complete and transparent picture of the company's financial health.

• Principle of Periodicity: It requires companies to divide their long, indefinite operating life into shorter, specific time periods like months, quarters or years for preparing financial reports. It gives timely and comparable financial information to stakeholders.

• Principle of Prudence: According to this principle, caution must be exercised when making judgements under uncertain circumstances. The assets and revenue should not be overstated. Also, the liabilities and expenses should not be understated. This principle ensures that any possible losses are recorded at  an early stage while any gains are recognized only when they are completely certain.

• Principle of Matching: According to this principle, revenues should be reported together with the expenses incurred to generate them. This ensures both are recognized within the same accounting period. 

• Principle of Continuity: It is also known as the going concern principle. According to this principle, the assets of a business are valued on the assumption that the organization will carry on with its operations in the foreseeable future and without the intention or need of the business to be liquidated.

Conclusion

GAAP stands for Generally Accepted Accounting Principles. They are used in the U.S. for financial reporting. These principles are meant to ensure that the financial reporting is done with transparency, accuracy and consistency. Their aim is to provide a reliable foundation for investors so they can make informed decisions. However, even with GAAP principles in place, financial statements can still be subject to manipulation or misinterpretation. Therefore, it is necessary to carefully scrutinize the financial statements.

Frequently Asked Questions (FAQs)

Q1. What is GAAP full form?

A. The full form of GAAP is Generally Accepted Accounting Principles. These principles are essential in the U.S. for the purpose of financial reporting. 

Q2. In which country are the GAAP principles applicable?

A. GAAP principles are applicable in the United States.

Q3. What is the difference between GAAP and IFRS?

A. The basic difference between them is that GAAP is based on legal authority and IFRS is principles based. GAAP is applicable in the USA but IFRS is applicable in many different countries across the world. 

Q4. Which authority develops and issues GAAP?

A. There are two authorities responsible for developing and issuing GAAP. The Financial Accounting Standards Board (FASB), an independent private sector body, develops and issues Generally Accepted Accounting Principles (GAAP) for private sector entities. The Governmental Accounting Standards Board (GASB) sets GAAP for state and local governments. 

Q5. What is FASB full form?

A. The full form of FASB is Financial Accounting Standards Board.

Q6. What is GASB full form?

A. The full form of GASB is Governmental Accounting Standards Board.

Q7. When was FASB established?

A. It was established in 1973 by Financial Accounting Foundation. Its establishment was done for the purpose of setting financial accounting and reporting standards in the U.S.

Q8. When was GASB established?

A. It was established in 1984. It was established for the purpose of establishing accounting and financial reporting standards for U.S. state and local government entities that follow GAAP.

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