Home > US generally accepted accounting principles

In the United States, as well as other countries practicing English common law system, the government does not set accounting standards, in the belief that the private sector has better knowledge and resources. The GAAP is not written in law, although the SEC requires that it be followed in financial reporting by publicly traded companies.

1 Conceptual frame work

GAAP has four basic assumptions, four basic principles, and four basic constraints.

1.1 Assumptions

• Economic Entity Assumption assumes that the business is a separate entity because the revenues and expenses should kept away from personal expenses. This applies even for partnerships and sole proprietorships.
• Going Concern Assumption assumes that the business will be in operation for a long time. This validates the methods of asset capitalization, depreciation, and amortization.
• Monetary Unit Assumption assumes a stable currency is going to be the unit of record. The FASB accepts nominal value of US Dollar as the monetary unit of record. (unadjusted for inflation)
• Periodicity Assumption assumes that the business operations can be recorded and separated into different periods. This is required for comparison between present and past performance.

1.2 Principles

• The historical cost principle requires companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities.
• The revenue recognition principle requires to record when revenue is realize d or realizable and earned, not when cash is received. The way of accounting is called accrual basis accounting.
• The third principle is the matching principle. Expenses have to be matched with revenues as long as it is reasonable doing so.
• The last principle is called the full disclosure principle. Amount and kinds of information disclosed should be decided based on trade-off analysis as larger amount of information costs more to prepare and use it. Information disclosed should be enough to make judgement while keeping costs reasonable.

1.3 Constraints

• Cost-benefit relationship states that the benefit of providing the financial information should also be weighted against the cost of providing it.
• Materiality states that significance of an item should be considered when it is reported.
• Industry practices states that accounting procedure should follow industry practices.
• Conservatism states that when choosing two unfamiliar solution, the conservative method should prevail.

2 Various details

• Revenue reporting. "Revenue" includes interest income, and excludes interest expense. Revenue is netted for general trading companies (" Sogo Shosha ").

3 Setting GAAP

Those organizations influence developing GAAP in the United States.

• Securities and Exchange CommissionSEC redirects here. For other uses, see SEC (disambiguation The Securities and Exchange Commission commonly referred to as the SEC is the United States governing body which has primary responsibility for overseeing the regulation of the securities industr (SEC)
• American Institute of Certified Public AccountantsThe American Institute of Certified Public Accountants AICPA is a self-regulatory organization of certified public accountants ( CPAs) in the U. The AICPA authors the CPA exam and is a major organization to develop generally accepted accounting principles (AICPA)
• Financial Accounting Standards BoardThe Financial Accounting Standards Board is a major organization to develop Generally Accepted Accounting Principles in the US ( US GAAP) along with SEC, AICPA, and GASB. It was created in 1973 and replaced its predecessor, the Accounting Principles Board (FASB)
• Governmental Accounting Standards BoardThe Governmental Accounting Standards Board is a major organization to develop generally accepted accounting principles ( GAAP) along with SEC, AICPA, and FASB. External links . (GASB)
• Other influential organizations

GAAP is composed of various documents. Accounting Principles Board (APB) dissolved in 1973Events January events January 1 United Kingdom, Ireland, and Denmark enter the European Economic Community now known as the European Union January 3 Columbia Broadcasting System (CBS) sells the New York Yankees for $10 million to a 12-person syndicate led and the FASB took over the responsibility setting up the standards.