GAPP

4 Pages 1073 Words

Generally Accepted Accounting Principles (GAAPs)

The common set of accounting principles, standards and procedures. GAAP is a combination of authoritative standards (set by policy boards) and the accepted ways of doing accounting.
These are the rules that companies are expected to follow. If a financial statement is not prepared using GAAP principles, be very wary!
That being said, keep in mind that GAAP is only a set of standards. There is plenty of room within GAAP for unscrupulous accountants to distort figures.

1. The Business Entity Concept

The business entity concept provides that the accounting for a business or organization be kept separate from the personal affairs of its owner, or from any other business or organization. This means that the owner of a business should not place any personal assets on the business balance sheet. The balance sheet of the business must reflect the financial position of the business alone. Also, when transactions of the business are recorded, any personal expenditures of the owner are charged to the owner and are not allowed to affect the operating results.


2. The Continuing Concern Concept

The continuing concern concept assumes that a business will continue to operate, unless it is known that it will not. The dollar values associated with a business that is alive and well are straightforward. For example, a supply of envelopes with the company’s name printed on them would be valued at their cost price. This would not be the case if the company were going out of business. In that case, the envelopes would be difficult to sell because the company’s name is on them. When a company is going out of business, the values of the assets usually suffer because they have to be sold under unfavorable circumstances. The values of such assets often cannot be determined until they are actually sold.


3. The Principle of Conservatism

The principle of conservatism provides that acc...