|Introduction to Accounting Principles|
|Basic Accounting Principles and Guidelines|
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There are general rules and guidelines that companies must follow when reporting financial data. These general rules 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. Accounting principles differ around the world, and countries usually have their own, slightly different, versions of GAAP.
Since accounting principles differ across the world, investors should be aware of these differences and account for them when comparing companies in different countries. The problem of differences in accounting principles does not much affect mature markets. Still, investors should be careful, since there is still leeway for the distortion of numbers under many sets of accounting principles
The phrase "generally accepted accounting principles" (or "GAAP") consists of three important sets of rules: (1) the basic accounting principles and guidelines, (2) the detailed rules and standards and (3) the generally accepted industry practices.
GAAP is exceedingly useful because it attempts to standardize and regulate accounting definitions, assumptions, and methods. Because of generally accepted accounting principles it enables to assume that there is consistency from year to year in the methods used to prepare a company's financial statements. And although variations may exist, it helps to make reasonably confident conclusions when comparing one company to another, or comparing one company's financial statistics to the statistics for its industry. Over the years the generally accepted accounting principles have become more complex because financial transactions have become more complex.
The Basic Principles:
Principles 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.
An error that is too trivial to affect anyone’s 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.