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Accountancy Key concepts Accountant Accounting period Accrual Bookkeeping Cash and accrual basis Cash flow forecasting Chart of accounts Convergence Journal Special journals Constant item purchasing power accounting Cost of goods sold Credit terms Debits and credits Double-entry system Mark-to-market accounting FIFO and LIFO GAAP / IFRS Management Accounting Principles General ledger Goodwill Historical cost Matching principle Revenue recognition Trial balance Fields of accounting Cost Financial Forensic Fund Management Tax (U.S.) Financial statements Balance Sheet

Cash flow statement Income statement Statement of retained earnings Notes Management discussion and analysis XBRL Auditing Auditor's report Control self-assessment Financial audit GAAS / ISA Internal audit SarbanesOxley Act Accounting qualifications

CIA CA CPA CCA CGA CMA CAT CIIA IIA CTP CFE CICA ACCA CIMA v t e

Generally Accepted Accounting Principles (GAAP) refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards. GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing, and in the preparation of financial statements.

Contents [hide] 1 US GAAP 1.1 Trend Towards a More Global Perspective 1.2 The Basic Principles 2 International accounting standards and rules 3 See also 4 External links

[edit] US GAAPMain article: Generally Accepted Accounting Principles (United States) It has been suggested that this article or section be merged into Generally Accepted Accounting Principles (United States). (Discuss) Proposed since October 2011.

The term "GAAP" is an abbreviation for Generally Accepted Accounting Principles (GAAP). GAAP is a codification of how CPA firms and corporations prepare and present their business income and expense, assets and liabilities on their financial statements. GAAP is not a single accounting rule, but rather the aggregate of many rules on how to account for various transactions. The basic principles underlying GAAP accounting are set forth below.

When preparing financial statements using GAAP, most American corporations and other business entities use the many rules of how to report business transactions based upon the various GAAP rules.

This provides for consistency in the reporting of companies and businesses so that financial analysts, banks, shareholders and the SEC (Securities & Exchange Commission) can have all reporting companies preparing their financial statements using the same rules and reporting procedures. This allows for an "apples to apples" comparison of any corporation or business entity with another. Thus, if company A reports $1,000,000 of net income, using GAAP, then the public and other users of financial statements can compare that net income to another company that is reporting $500,000 of net income, using GAAP.

The rules and procedures for reporting under GAAP are complex and have developed over a long period of time. Currently there are more than 150 "pronouncements" as to how to account for different types of transactions, ranging from how to report regular income from the sale of goods, and its related inventory values, to accounting for incentive stock option distributions. By using consistent principles, all companies reporting under GAAP report these transactions on their financial statements in a consistent manner.

The various rules and pronouncements come from the Financial Accounting Standards Board (FASB) which is a non-profit organization that the accounting profession has created to promulgate the rules of GAAP reporting and to amend the rules of GAAP reporting as occasion requires. The more recent pronouncements come as Statements of the Financial Accounting Standards (SFAS). Changes in the GAAP rules can carry tremendous impact upon American business. For example, when FASB stopped requiring banks to mark their assets (loans) to the lower of cost or market (i.e. value of a foreclosed home loan), the effect on a bank's "net worth" as defined by GAAP can change dramatically. While generally neutral, there is some pressure on the FASB to yield to industry or political pressure when it makes its rules.

Nonetheless, since all companies report using the same set of rules, knowing the rules of GAAP reporting can tell the user of financial statements a great deal. The study of accounting, in large part, entails learning the many rules and promulgations set forth by FASB and how to apply those rules to actual business events.

[edit] Trend Towards a More Global PerspectiveGAAP is slowly being phased out in favor of the International Financial Reporting Standards (IFRS)[citation needed] as global business becomes more pervasive. GAAP applies only to United States financial reporting and thus an American company reporting under GAAP might show different results if it was compared to a British company that uses the International Standards. While there is close similarity between GAAP and the international rules, the differences can lead a financial statement user to believe incorrectly that company A made more money

than company B simply because they report using different rules. The move towards International Standards seeks to eliminate this kind of disparity.

[edit] The Basic PrinciplesPrinciples derive from tradition, such as the concept of matching. In any report of financial statements (audit, compilation, review, etc.), the preparer/auditor must indicate to the reader whether or not the information contained within the statements complies with GAAP.

Principle of regularity: Regularity can be defined as conformity to enforced rules and laws. Principle of consistency: This principle states that when a business has once fixed a method for the accounting treatment of an item, it will enter in exactly the same way all similar items that follow. Principle of sincerity: According to this principle, the accounting unit should reflect in good faith the reality of the company's financial status. Principle of the permanence of methods: This principle aims at allowing the coherence and comparison of the financial information published by the company. Materiality concept: An item is considered material if its omission or misstatement will affect the decision making process of the users. Materiality depends on the nature and size of the item. Only items material in amount or in their nature will affect the true and fair view given by a set of accounts. An error that is too trivial to affect anyones understanding of the accounts is referred to as immaterial. In preparing accounts it is important to assess what is material and what is not, so that time and money are not wasted in the pursuit of excessive detail.

Principle of non-compensation: One should show the full details of the financial information and not seek to compensate a debt with an asset, revenue with an expense, etc. (see convention of conservatism) Principle of prudence: This principle aims at showing the reality "as is": one should not try to make things look prettier than they are. Typically, revenue should be recorded only when it is certain and a provision should be entered for an expense which is probable. Principle of continuity: When stating financial information, one should assume that the business will not be interrupted. This principle mitigates the principle of prudence: assets do not have to be accounted at their disposable value, but it is accepted that they are at their historical value (see depreciation and going concern). Principle of periodicity: Each accounting entry should be allocated to a given period, and split accordingly if it covers several periods. If a client pre-pays a subscription (or lease, etc.), the given

revenue should be split to the entire time-span and not counted for entirely on the date of the transaction. Principle of Full Disclosure/Materiality: All information and values pertaining to the financial position of a business must be disclosed in the records. Principle of Utmost Good Faith: All the information regarding to the firm should be disclosed to the insurer before the insurance policy is taken. [edit] International accounting standards and rulesMany countries use or are converging on the International Financial Reporting Standards (IFRS), established and maintained by the International Accounting Standards Board. In some countries, local accounting principles are applied for regular companies but listed or large companies must conform to IFRS, so statutory reporting is comparable internationally, across jurisdictions.

International Financial Reporting Standards

From Wikipedia, the free encyclopedia

Jump to: navigation, search

Accountancy
Key concepts

Accountant Accrual Bookkeeping

Accounting period

Cash and accrual basis Cash flow forecasting Chart of accounts Convergence Journal Special journals Cost of goods sold Credit terms Debits and credits Double-entry system

Constant item purchasing power accounting

Mark-to-market accounting

FIFO and LIFO GAAP / IFRS General ledger

Management Accounting Principles

Goodwill Historical cost

Matching principle Revenue recognition Trial balance

Fields of accounting

Cost Financial Forensic Fund Tax (U.S.)

Management

Financial statements Balance Sheet

Cash flow statement Income statement

Statement of retained earnings Notes XBRL

Management discussion and analysis

Auditing

Auditor's report Financial audit GAAS / ISA Internal audit

Control self-assessment

SarbanesOxley Act

Accounting qualifications

CIA CA CPA CCA CGA CMA CAT CIIA IIA CTP CFE CICA ACCA CIMA

v t e

International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particulalrly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards. IFRS began as an attempt to harmonise accounting across the European Union but the value of harmonisation quickly made the concept attractive around the world. They are sometimes still called by the original name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On April 1, 2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards International Financial Reporting Standards (IFRS).