Generally Accepted Accounting Principles (G.A.A.P)

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GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (G.A.A.P) GAAP is an international convention of good accounting practices. It is based on the following core principles. In certain instances particular types of accountants that deviate from these principles can be held liable. The Business Entity Concept The business entity concept provides that the accounting for a business or organization be kept separate from the personal affairs of its owner, or from any other business or organization. This means that the owner of a business should not place any personal assets on the business balance sheet. The balance sheet of the business must reflect the financial position of the business alone. Also, when transactions of the business are recorded,…show more content…
If this is not done, the financial statements will not measure the results of operations fairly. The Cost Principle The cost principle states that the accounting for purchases must be at their cost price. This is the figure that appears on the source document for the transaction in almost all cases. There is no place for guesswork or wishful thinking when accounting for purchases. The value recorded in the accounts for an asset is not changed until later if the market value of the asset changes. It would take an entirely new transaction based on new objective evidence to change the original value of an asset. There are times when the above type of objective evidence is not available. For example, a building could be received as a gift. In such a case, the transaction would be recorded at fair market value which must be determined by some independent means. The Consistency Principle The consistency principle requires accountants to apply the same methods and procedures from period to period. When they change a method from one period to another they must explain the change clearly on the financial statements. The readers of financial statements have the right to assume that consistency has been applied if there is no statement to the contrary. The consistency principle prevents people from changing methods for the sole purpose of manipulating figures on the financial statements. The Materiality Principle The materiality principle requires

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