The Generally Accepted Accounting Principles (GAAP) are a set of standard accounting principles, procedures, and standards that companies use to compile their financial statements. GAAP ensures that the financial reporting is transparent and consistent, making it easier for investors and stakeholders to understand and compare the financial health of different companies.
GAAP includes principles such as the historical cost principle, revenue recognition principle, and matching principle, among others, to ensure accuracy and reliability in financial reporting.
In Grade 12, accounting education aligns with the Curriculum and Assessment Policy Statement (CAPS) to provide a comprehensive understanding of GAAP and its application in financial reporting
What are generally accepted accounting principles?
Generally accepted accounting principles (GAAP) refer to a common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB). Public companies in the U.S. must follow GAAP when their accountants compile their financial statements.
GAAP Principles with Examples
- Entity rule: The financial affairs of the owners should be kept separate from those of the business – they are separate entities. Example: The business has its own bank account and the owners each have their own bank accounts.
- Historical cost concept: Assets should be entered at its historical cost; this is the amount that was originally paid for them. Example: Land and buildings purchased for R500 000 will be entered at that amount in the books, even if the business can sell it for a lot more after a couple of years.
- Going concern concept: The financial statements of a business are prepared with the assumption that the business will continue operating in the foreseeable future. Example: If a business had stationery printed in the name of the business to the value of R5 000 and it is unused at the end of the financial period, it will be shown at that value in the financial statements as a current asset. However, if the business is closing down in the next financial period, this stationery will have no value.
- Matching concept: Income and expenses must be accounted for in the correct time period (the one in which they were incurred). Example: The telephone account for February 2020 must be taken into account in the financial period ending 28 February 2020, even though the account will only be paid in March 2020.
- Prudence concept: When uncertain results are estimated, it is important to ensure that assets and income are not overstated and liabilities and expenses are not understated. Example: If the business expects to make a profit of R100 000 on the sale of part of the building, it will not be entered in the books until the transfer of the land has been concluded.