Info 1: GAAP definition
Info 2: how GAAP works
Info 3: GAAP VS IFRS
Info 4: example for GAAP
Quick pick:
GAAP is an accounting rule that is created for recording the credit, debt, and balance of the company in a certain order manner.
Opening information:
Generally accepted accounting principles mean methods of debts and credits which are created by core rules in formally agreed standards.
This article explored what is Generally accepted accounting principles, how the GAAP works, and what is the difference between GAAP and IFRS, finally one brief example of GAAP.
Info 1: Generally accepted accounting principles definition
Whenever we write an exam there are separate mark questions, 2 marks, 5 marks, and 10 or 20 marks questions. Moreover, sometimes there are also no different mark questions but the same one-mark questions for a full exam question paper.
But none of the exams are written and the exam is without any principles of rules and separation in the question and answer sheet.
For instance, any exam questions are created with the manner of, if the test contains 20 one-mark questions, then without asking or recording that one mark question, the question paper won’t return and record the other types of mark questions such as 2 or 5 marks.
However it was completely created in an orderly manner with first of all one mark questions to answer, then 2 marks, and then 5 marks, and so on. Not in the order of first 10 or 5 marks or 3 marks questions without asking one mark questions in the exam.
This same concept would be applied to accounting credit and debits of any public Industry with some orderly principles and rules to study one company’s Profits and losses, balanced assets, and then cash flow for the year.
This orderly principle and rules of the statement are the ones which are used and possessed by all public companies to spread the credits and debits activities of the whole company.
Here statement of principles and rules for accounting with accepted standards are named as Generally accepted accounting principles, in other words, GAAP.
So now let’s dive into how these Generally accepted accounting principles work, function, and are helpful in the public market.
Info 2: Generally accepted accounting principles works
GAAP doesn’t represent a specific object instead it’s a method that is created for accounting for the credit and debts of income, balance sheet, and cash flow statement for any firm.
In accounting, there would be tens and hundreds of methods could be created for understanding the matters of credit and debts but using the one accounting method from all the firms helps to understand each firm excellently.
That method is a generally accepted accounting principle (GAAP), it was created by the firm of financial accounting standard board and Governmental Accounting Standard Board in the United States of America.
Although this GAAP accounting method is likely inherited and formed based on the same principles but with different methods of international accounting standard board, this made all the companies practice the same accounting framework to understand the certain company or business easily and efficiently.
Based on the method they created, each of the non-profit firm institutions too big Corporations practices the same accounting principle to fulfill the credit and debits of the whole business.
Moreover, all institutions of banks and Investors use this method of accounting terms to pay taxes and receive income for it.
Apart from the United States, European countries in Asia used the International Financial Reporting Standards (IFRS) in more than 100 countries.
Although the GAAP was created with the core principle of consistently using the permanent method for compensation and prudence with regularity and Sincerity for having good Faith with materiality over the Periodicity in Continuity. This principle would help the main each of the firms stay true to the auditing works.
Most people confuse the generally accepted accounting principle (GAAP) and International
financial reporting standard (IFRS), so let’s jump into the key difference in it anyway.
Info 3: GAAP VS IFRS
The GAAP refers to the accounting method which is used in the United States of America by all the public Corporations.
On the other side, IFRS is the international financial reporting standard is the accounting method which is used and created by the European accounting boards.
These two methods are accounted method but two of them are used by different kinds of countries. To make you more clear the GAAP let’s jump into know the key difference in it anyway.
Info 4: Example for GAAP
Say company G is the American tech industry that has survived in the public market, it’s submitted the annual report of the financial statement of 10k reports to the Security and Exchange Commission.
The other company U had been in the market of Uk stock exchange, which has been in market for almost 19 years. it had submitted his 10k reports to the Financial Conduct Authority.
Here the Company G 10k financial statement is in the form of GAAP and Company U is shown in the form of IFRS.