Generally Accepted Accounting Principles (GAAP)

WHAT IS GAAP?

GAAP acronyms as "Generally Accepted Accounting Principles," it used to guide the accounting system we use todays world and the accounting industry follows a code of ethics that incorporates the use of the GAAP for all subsequent transactions.

PRIMARY PRINCIPLES that are MAINLY FOLLOWED BY GAAP

1. Historical Cost Principle
2. Revenue Recognition Principal
3. Full Disclosure Principle
4. Matching Principle

GAAP ASSUMPTIONS

1. Going Concern Assumption: The company or entity is a “going concern” and is not likely to end operations in the current year. It is expected to remain in business for the foreseeable future. Any exceptions to this assumption must be disclosed.
2. Economic Entity Assumption: The company is an independent entity and is separate from it’s owners.
3. Monetary Unit Assumption: The currency used to measure the entity’s financial performance is stable.
4. Periodic Reporting Assumption: Business operations are reported on a regular basis, usually annually. The fiscal year doesn’t have to be the same as the calendar year. This is usually set according to the business cycle for the particular company.

In CANADA GAAP

1. OFFICIAL Pronouncements of the ACCOUNTING STANDARDS BOARD (ACsB)


2. Other pronouncements of the Accounting Standards Board – these are not as specific as the official prouncements mentioned above
   
   Other Sources – such as US Pronouncements, Industry standards or International standards.”

BEYOND GAAP
Two types of corporations:

1. Public corporations – issues securities to the public (whether
   debt or equity) If the company is public - then must use GAAP
   
2. Private corporation – does not issue securities to the public
   
   If the company is private – then several choices;
   1. GAAP
   2. Differential GAAP - Big company/little company
   3. Foreign Parent company accounting policies
   4. Disclosed Basis of Accounting – however if this type of accounting is followed, then one has to describe the Policy in the Notes to The Financial Statements – otherwise it may be misleading to the reader of the financial statements(more common)

Each country has its own GAAP, but there is a great pressure to have a standard GAAP throughout the world.