GAAP further set out specific rules and principles governing elements such as standardised currency units, cost, and Revenue Recognition, financial statement format and presentation, and required disclosures. Principle of periodicity: This principle refers to entities abiding by commonly accepted financial reporting periods, such as quarterly or annually.Principle of materiality: All financial reporting should clearly disclose the organisation’s genuine financial position.Principle of good faith: Similar to the previous principle, this principle asserts that anyone involved in financial reporting is expected to be acting honestly and in good faith.Principle of sincerity: Accountants should perform and report with basic honesty and accuracy.Principle of regularity: This principle means that all accountants are to consistently abide by GAAP.Principle of prudence: All reporting of financial data is to be factual, reasonable, and not speculative. Principle of non-compensation: This principle states that no entity is to expect any compensation for providing full and accurate financial reporting.Principle of permanent methods: Closely related to the previous principle is that of consistent procedures and practices being applied in accounting and financial reporting.Principle of consistency: This principle ensures that consistent standards are followed in financial reporting.GAAP is set forth in 10 primary principles, as follows: It is an alternative, or addition to, the International Financial Reporting Standards (IFRS) framework that governs how most companies outside of the US report their financial statements. GAAP is controlled by the Financial Accounting Standards Board (FASB) in Connecticut, US. Its origins began with The Securities Act of 1933 and the Securities Exchange Act of 1934. GAAP is not a law, an important distinction. Poor and inconsistent financial reporting and oversight was identified as a contributing cause of the meltdown. US law requires all publicly traded companies, as well as any company that publicly releases financial statements, to follow GAAP principles and procedures.Įstablished in the United States, GAAP originated as a result of the stock market crash of 1929, and subsequent Great Depression.
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