What are the Accounting Principles and Guidelines?
Generally accepted accounting principles, or GAAP as they are more commonly known, are rules for the preparation of financial statements.
Every publicly traded company must release their financial statements each year.
These statements are used by investors, banks and creditors to determine the financial health of the company and its suitability for investment or extension of credit. In order to properly compare and evaluate companies and their results, the financial statement must provide similar information in a similar format.
Every country has its own generally accepted accounting principles, and all publicly released financial statements must comply with these rules.
GAAP is considered to include three sets of rules:
- The basic accounting principles – These accounting principles and guidelines form the basis from which more complex and detailed rules are created.
- The rules set out by the Financial Accounting Standards Board (FASB) – These are in-depth rules and regulations that dictate accounting policy in greater detail than the basic accounting principles.
- Generally accepted industry practices – These are the standard accounting principles that are followed industry wide.
Companies that make their financial documents available to the public are obligated to adhere to the GAAP during the preparation of these documents. Below are five categories of accounting principles that South African accountants follow.
Identification accounting principles
In order for an accountant to accurately record the financial transactions of an entity, the entity’s physical parameters must be identified. The entity is usually a business or corporation, and identification separates it as a financial entity from its owners, employees, clients, affiliated groups, shareholders and any other parties that may be connected to the business.
Significance accounting principles
In order for accounting to be effective, its practice must be predictable and reliable. By implementing an accounting system to be used over the course of several financial periods, a business can accurately ascertain whether it is making a profit or a loss.
Function accounting principles
Accounting principles are used to tackle functional problems such as when to record a business’s incomes and expenses. Certain principles make it clear that revenue should be recorded as and when it occurs, while others such as the matching principle recommend that investments and profits from these investments should be recorded in the same time period. This makes it simple for investors to see when and how their money is used.
Features accounting principles
The principle of periodicity allows businesses to treat any period as a financial period for a business. While a business may not start or end on a specific date (since the business continues indefinitely), the principle of periodicity allows accountants to present records as if this specific period was the only one of importance.
Considerations accounting principles
The final group of accounting principles offer guidelines of how to present accounting information and the financial status of an entity. These are important in order to provide an accurate picture of the entity’s financial statement as it really is by treating assets in an orthodox manner.