Generally Accepted Accounting Principles

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

The Business Entity Concept

The business entity concept shows that the personal affairs of the owner or any other outside business and the accounting of that business be kept separate. Meaning the owner should not record personal assets on the business balance sheet as the balance sheet should represent the financial standing of the business alone. Also, while recording business transactions, any personal expenditure of the owner is charged to him/her, it is not allowed to affect the accounting records of the business.

The Continuing Concern Concept

The continuing (or going) concern concept assumes that a business will continue its operations unless it is known otherwise. Ascertaining the value of an asset from an operational business is simple. Ascertaining the value of an asset of a business that is going out of business is more complex as the products of the business must now be sold under unfavorable circumstances. The value of assets usually suffers but the actual value of the product is never fully known until after it is sold.

The Principle of Conservatism

The principle of conservatism states that accountants should be ethical while undertaking procedures in the accounting process for a business. This means that the accountant should not undervalue or overstate the assets of a business under any circumstances.

The Objectivity Principle

The objectivity principle also ties into good business ethics. It states that accounting should be recorded on the basis of objective evidence. This means that two accountants looking at the same source document should come to the same accounting conclusion. This could also be viewed as "professional courtesy", basing your accounting entries on fact and not fiction.

The Time Period Concept

This concept ensures that all accounting is done over specific time periods. These different time periods are known as "fiscal periods", they are of equal length and used when determining the financial progress of a business.

The Revenue Recognition Convention

The revenue recognition convention ensures that revenue be recognized at the time of transaction. This simply means recording revenue when the customer receives the bill. In a cash transaction this takes place at the point when the cash is received from the customer. Although in certain situations this cannot be properly applied, e.g. Constructing a building could take years but the construction company contracted to do so would not wait until the building is completely finished to collect their payment, therefore they charge periodically for work completed