Generally accepted accounting principles Paper Example

Generally accepted accounting principles: commonly abbreviated as GAAP are accounting rules used to prepare, present, and report financial statements for a wide variety of entities, including publicly-traded and privately-held companies, non-profit organizations, and governments. Generally GAAP includes local applicable Accounting Framework, related accounting law, rules and Accounting Standard. Auditors took the leading role in developing GAAP for business enterprises.

Circa 2008, the FASB issued the FASB Accounting Standards Codification, which reorganized the thousands of US GAAP pronouncements into roughly 90 accounting topics In 2008, the Securities and Exchange Commission issued a preliminary “roadmap” that may lead the U. S. to abandon Generally Accepted Accounting Principles in the future (to be determined in 2011), and to join more than 100 countries around the world instead in using the London-based International Financial Reporting Standards.

wikipedia Going concern: A going concern is a business that functions without the intention or threat of liquidation for the foreseeable future, usually regarded as at least within 12 months. A company is required to disclose in the notes to the financial statements whether there are any factors that may put the company’s status as a going concern in doubt. Where a company is not a going concern, the break-up basis is used where all assets and liabilities are stated at Net Realizable Value.

Auditors are at risk of being sued by financial statement users if a company that did not receive a modified opinion becomes bankrupt, although litigation reform in the 1990s lowered the risk of being sued and the liability if such a suit is successful Accounting principles 3 The Accrual Principle : The Accrual Principle may be called the mother of all accounting principles. It ensures that revenues and expenses are booked (recorded) when earned and incurred and not necessarily when cash is exchanged. The Accrual principle therefore brings into play other important principles such as Revenue Recognition and matching (see below).

The company will therefore book revenue when the sale is made (based on the principles of revenue recognition) and will book expenses when incurred and against the revenue it helped to generate. Cost Principle: From an accountant’s point of view, the term “cost” refers to the amount spent (cash or the cash equivalent) when an item was originally obtained, whether that purchase happened last year or thirty years ago. For this reason, the amounts shown on financial statements are referred to as historical cost amounts. Because of this accounting principle asset amounts are not adjusted upward for inflation.

In fact, as a general rule, asset amounts are not adjusted to reflect any type of increase in value. Hence, an asset amount does not reflect the amount of money a company would receive if it were to sell the asset at today’s market value. (An exception is certain investments in stocks and bonds that are actively traded on a stock exchange. ) If you want to know the current value of a company’s long-term assets, you will not get this information from a company’s financial statements—you need to look elsewhere, perhaps to a third-party appraiser