Generally Accepted Accounting Principles Definition
Generally Accepted Accounting Principles Definition – The rules and conventions that accountants follow when recording and summarizing transactions and preparing financial statements.
What happens if one account follow a different assumption while writing numbers or transactions and other accountant follows another. This will make impossible for the users of the information to interpret the information or compare on entity with another. Hence there are set of standard rules, concepts and conventions on the basis of which the accountant records the transaction in the books of account.
The foremost purpose of GAAP is to bring about the transparency and consistency in the financial reporting. There is no universal GAAP. With change in geographical boundaries, GAAP also changes. However most of the countries have adopted International Financial Reporting Standards given by Financial Accounting Standard Board. Still each country has done some modification in it.
Generally Accepted Accounting Principles Example
In order to make understand the readers generally accepted accounting principles definition, we have come up with few of its example. Following are the accounting principles and conventions that are followed in India.
- Business Entity Concept
- Money Measurement
- Dual Aspect
- Cost Concept
- Realization concept
- Verifiable Concept
- Conservatism Convention
- Convention of Full Discloure
- Going Concern Concept, etc
Importance of Generally Accepted Accounting Principles
In order to have a common assumptions or standards to record the accounting transaction GAAP is very important. If there no GAAP, then accountants will record transaction as per their own preference. So, for comparing the financials of one organisation with another, it is important that a common set of rules or standards are followed.
In addition to this, Generally accepted accounting principles also draw a line between what is good accounting and what is wrong. This is very helpful in case of detecting various frauds.