Generally Accepted Accounting Principles (GAAP) are the most commonly recognised principles within accounting. They are adhered to by a wide number of companies all over the world. The follow a standard framework and are also known as the accounting standards. Accountants must follow the principles when recording and summarising as well as during the preparation procedure of compiling a financial statement.
Is GAAP Obligatory?
There is an option to opt out of following the GAAP if the business in question operates on a cash basis, but these days, that tends to be quite rare. It’s advised that the GAAP are followed if a business runs on an accrual basis. These general rules and concepts govern the field of accounting and help ensure that accounting practices are completed fairly and accurately.
What Does GAAP Consist Of?
GAAP comprises of three crucial sets of rules, which are as follows;
- The basic accounting principles and guidelines
- The detailed rules and standards issued by the Financial Accounting Standards Board (FASB)
- The generally accepted industry practices
For companies that must issue their financial statements publicly, it’s imperative that they follow the GAAPs. It is a useful set of principles because it helps to regulate methods, definitions and assumptions within accounting to promote consistencies in the procedures exercised from year to year.
If a business aims to sell stock one day in the future, understanding the generally accepting accounting principles (GAAP) is a must. So, if you’re an aspiring accountant, it’s certainly worth reading up on the principles and familiarising yourself with them prior to commencing your studies. This will give you a head start in your career as an accountant and will ensure you’re raring to go come day one of your accountancy course.
What Does GAAP Entail?
Again, these standards are put in place to ensure companies can follow them when reporting their financial information, this includes activities such as;
- Disclosing details about an activity
- Measuring economic movement
- Preparing and reviewing financial data
- Recording data on a frequent basis
GAAP is not government-regulated, but it’s in operation due to a mutual effort of business and government. As stated earlier, it isn’t mandatory, but it is required by UK company law for companies to prepare their financial statements, certainly for public trading businesses.
We hope this article has helped you familiarise yourself with the Generally Accepted Accounting Principles (GAAP) used within the UK. For further information, please click here.