The Generally Accepted Accounting Principles (GAAP) are a set of standards and guidelines that provide a framework for financial reporting. The GAAP includes the following principles:
- Business Entity Concept: This principle assumes that a business is a separate entity from its owners, creditors, and other stakeholders.
- Going Concern Concept: This principle assumes that a business will continue to operate for the foreseeable future and will not go bankrupt.
- Historical Cost Principle: This principle requires that a business record assets at their original cost.
- Objectivity Principle: This principle requires that a business base its financial statements on objective evidence.
- Stable Monetary Unit Concept /Unit of Measurement: This principle assumes that the value of money is stable over time and that financial statements should be presented in a consistent unit of measurement.
- The Periodicity Concept /Accounting Period Concept: This principle assumes that a business can be divided into artificial time periods for the purpose of preparing financial statements.
- The Matching Principle: This principle requires that a business match expenses with the revenue they helped generate.
- Revenue Realization Principle: This principle requires that a business recognize revenue when it is earned, regardless of when payment is received.
- Adequate Disclosure Principle: This principle requires that a business disclose all relevant information in its financial statements.
- The Consistency Principle: This principle requires that a business use the same accounting methods from one period to the next.
- The Materiality Concept: This principle requires that a business consider the materiality of an item when deciding whether to include it in its financial statements.
- The Conservatisms (Prudence) Concept: This principle requires that a business be conservative in its estimates and assumptions, and that it report financial information in a way that is not overly optimistic.