GAAP Generally Accepted Accounting Principles.
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Accounting Concepts and Principles.
GAAP stands for the Generally Accepted Accounting Principles. These are the rules, guidelines, and principles that entities (businesses/firms/companies/organizations/systems/hospitals) follow in the US to guide the preparation and reporting of their financial statements.
1. Entity Concept. A company is treated as an entity that is separate and distinct from its owners. Owner and company are two different entities having different liabilities.
The assumption here is that a company has its own identity distinct from the owners, creditors, debtors, managers, and others.
2. Revenue Recognition (Realisation Concept). Recognizing the revenue means recording the income in the income statement, prepared for a particular period.
Recognition of revenue should be on the accrual basis of accounting; events and conditions are recorded in the books of accounts as and when they occur, rather than in the period of their receipt of payment.
Accrual basis is a method of recording accounting transactions for revenue when earned and expenses when incurred.
3. Prudence (Conservatism) Principle. The rule of playing it safe. A cautious approach in ascertaining the income of the entity.
If a situation arises where there are 2 acceptable options for reporting an item, accountants go for the less favorable option.
All anticipated profits should be ignored but all anticipated losses should be accounted for.
Profits in anticipation should not be recorded but losses in anticipation should immediately be recorded even if there is a very remote possibility of occurrence of such losses.
4. Money Measurement (Monetary Unit Concept).
A fact or a transaction is recorded in the accounting books only if the effect of this situation or transaction can be computed in monetary terms.
For instance, adverse impact on revenue due to lack of coordination between the front office team and operating room team cannot be recorded in the books of accounts, however, the loss of supplies due to fire or flood can be recorded in the books.
5. Accounting Period Principle.
The accounting period is usually a period of one year and that year can be a financial year, a calendar year, or any year of 12 months.
For tax purposes, the accounting period should be a financial year i.e., a year starting from 1st April to 31st March.
The accounting period helps in maintaining accounting records, showing actual profit or loss, establishing the true and fair view of the financial position of the company, and communicating the company information to the intended users.
6. Full Disclosure Principle.
The entity is required to disclose the full, fair, and sufficient information; no information of substance should be concealed in the financial statements. This principle ensures effective communication with the intended users, internal and external.
7. Materiality Concept.
8. Cost Concept.
9. Matching Principle.
10. Dual Aspect Concept (Duality principle or Accounting Equation Concept).
11. Objectivity Principle (Verifiability & Objectivity Evidence Concept).
12. Timeliness principle.
13. Substance over Form Principle.
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