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What are the Generally Accepted Accounting Principles that you need to know about?

Accounting Principles

In the world of accounting, there are a few standards that must be followed. These standards are set in place in order to prevent any sort of loss of trust in these companies that handle any sort of financial transactions. These standards are called GAAP (Generally Accepted Accounting Principles). And these accounting standards were not developed overnight. Instead, the history of these accounting standards is pretty long. But to put it quickly, the basis for the generally accepted accounting principles started all the way back in the 1920’s during the huge stock market crash. In order to prevent the same thing from occurring again, financial authorities such as big banks started to develop a new set of rules for more transparent and accurate accounting methods. And over the years as accounting has evolved, the generally accepted accounting principles that we know today was developed.

But what are specifically the generally accepted accounting principles? Well, if you do not know what the specifics of GAAP are, then you have come to the right place. You definitely need to know about the 10 different generally accepted accounting principles and use the same kind of standards for accounting in your own business. After all, if you want to keep your company’s financial and accounting activities accurate, then you need to follow these 10 standards.

Business Entity Assumption

One of the core principles of GAAP is that a business is considered as a single entity. This will mean that even for inter-departmental financial records, everything in the business will be considered one and the same.

The Specific Monetary Unity Principle

For accounting purposes, all of the financial transactions in business will be reported in a single currency. And that is usually US Dollars. This is to ensure that the total monetary value of any transaction is easily understood across multiple markets.

Time Period Principle

Any sort of financial reporting of a business can be broken down into specific time intervals or periods. For example, in one single fiscal year, financial and business reports are usually broken down into quarters. This would total to 4 different fiscal quarters per year.

Historical Cost Principle

To value any sort of item or property, the historical value of that specific thing will be used. What this means specifically is that the value of an item is determined, including inflation, using how much it used to cost in the past.

Full Disclosure Principle

Any sort of info that could potentially be useful to an investor or even a lender should be disclosed to them. Companies need to make sure that they make every relevant detail about financial transactions fully available for anyone to know about.

Going Concern Principle

There is an assumption that your business will continue on to meet all of its current financial obligations. And when doing any sort of accounting activity for your company, that assumption will be firmly in place. In fact, most accounting principles would state that you need to assume that your business is going to be eternally there.

Matching Principle

In modern accounting, expenses should be matched to each revenue that a company receives. And this practice is called accrual accounting. If you want to account for every financial transaction of your business, then make sure to follow this principle as closely as you can.

Materiality Principle

This principle will actually allow an accountant to ignore or break one of the other principles in GAAP. They can do that provided that the issue that they are dealing with is insignificant materially, what that means is that the thing is not that costly or the expenses are irrelevant in the grand scheme of things.

Recognition Principle

Any sort of financial activity that the company does, whether it is an expense or income, will be recognized as having already occurred. This is true even if the company has yet to receive or send a payment for that specific financial transaction.

Conservative Principle

If an accountant has got multiple choices when it comes to the value of a transaction or item, then they must choose the more financially conservative option. For example, if they are going to report on the value of an item, then they will generally take into account the lower value of that item.

These are the generally accepted principles of accounting that you must adhere to as a company. If you are going to issue invoices, record your financial transactions or even calculate taxes, then you have got to make sure that you are following all ten of these various principles. This is because that would be the only way for you to ensure that you are meeting the current standards that are set by professional accountants. If you do not follow these sorts of principles, then your business may lose its competitive edge. And you may even end up incurring more costs in the long run too.

One reason why you need to ensure that you are following these principles for good accounting that you will be able to ensure that your bookkeeping and accounting activities are efficient and cost-effective. You may end up having to pay more for the same kinds of accounting activities if you do not follow these sorts of principles. After all, if you adopt those other kinds of accounting principles, then you may make your whole bookkeeping process more efficient and error-free, thus, you can ensure that your business will do well in the long run.

If you do want accountants who can follow all of these generally accepted principles, then it may be a great idea to outsource those activities from your business. Outsourced serviced providers hire competent bookkeepers who are trained and educated properly. So you can rest assured that the bookkeepers that you will outsource your accounting activities. They will follow all of these various generally accepted accounting principles. This will result in better and more accurate record keeping for your firm, and also help you reduce the costs that are required to manage all of your accounting and other financial records needs.

Read our article:KPIs for Finance and Accounting Department

Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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