In accounting, there are standards imposed by governing bodies such as the Securities and Exchange Commission, American Institute of Certified Public Accountants and Financial Accounting Standards Board regarding acceptable procedures. The General Accepted Accounting Principles or GAAP reflect the proper mode of documentation and reporting information relevant to this field of specialization. The GAAP is enforced on corporations to establish a degree of uniformity in financial statements. This is for the benefit of investors and with respect to investment objectives. Corporate organizations encompass categorization of items in the balance sheet; classification of revenues; and, allocation of shares. Corporate organizations should adhere to these norms of general accounting in the process of reporting data through financial statements.
Motives for Making Use of the GAAP
Business firms, which expect outsiders to review its monetary records, must utilize the General Accepted Accounting Principles. Observance of these tenets helps in maintaining integrity among creditors, shareholders and other companies. Outside parties who are given access to such records will always presume that the statements are in order and meet the terms of the GAAP. Certified Public Accountants are hired to audit companies to check if financial statements are done in accordance with the GAAP. Banking and financing institutions also oblige clients to utilize this set of standards. That is why statements should always conform to the expectations of investors. There are fundamental theories that are pertinent to the GAAP. These are technical benchmarks that the general accountant should follow in the course of preparing said statements.
One essential hypothesis is referred to as economic entity assumption. Financial records should be kept separately for every economic unit. These entities refer to private enterprises, government offices, school localities, religious sectors and social clubs. Economic occurrences should be correlated and recorded by a particular entity although accounting information from various entities can be put together for purposes of financial reporting. Business records should not contain the proprietors’ personal assets or liabilities.
Another assumption relates to monetary units. The accounting records of an economic entity should take in only quantifiable deals. There are some economic events that affect a corporate organization such as the appointment of a new CEO or the launching of a commodity. This cannot be easily measured in monetary units. Thus, these cannot appear in the firm’s accounting records.
The principle of full disclosure is a third vital consideration. As a rule, financial statements present information regarding the previous performance of any company. Nonetheless, pending court cases and unfinished transactions may have impending considerable effects on the company’s financial condition. The full disclosure principle mandates that financial statements should contain revelation of this information.
There is also the time period assumption in general accounting. Enterprises must utilize simulated time periods to report business activity results. This duration can be from one day to a year or even an indefinite period. As soon as the time period has been ascertained, accountants employ the GAAP to document and report transactions for that specific time frame. There are other assumptions which include accrual or accumulation basis of accounting, principle of revenue recognition, matching principle, going concern, materiality, and conservatism principles. The bottom line is to achieve consistency and relevance since financial information must always be pertinent to help in business-decision making.