Generally Accepted Accounting Principles

Generally Accepted Accounting Principles

Generally Accepted Accounting Principles
Generally Accepted Accounting Principles, also known as GAAP, is a set of rules and guidelines for accounting standards, used by accountants to prepare financial statements and to summarize and record transactions. GAAP rules are used by most organizations to report transactions. This allows a consistency in organization’s recording measures so a comparison between organizations can be obtained. The standards of GAAP have been developed over a long period and are complex. There are many rules for accounting for varying types of transactions. GAAP standards allow financial statements to show reporting of transactions with consistency (Bradford, 2007).
Both financial and managerial accounting must be considered in the principles of accounting. Managerial accounting depends on the principles of financial accounting since it does not have its own adopted principles. There are five principles of accounting that applies to both financial and managerial accounting; Accounting Entity, Money Measurement, Duality, Cost Valuation, and Stable Monetary Unit (Cleverly, Song, & Cleverly, 2011).
The first principle is Accounting Entity. When financial statements are being prepared, the place where this takes place must be recorded. This is the accounting entity. Examples of accounting entities are hospitals, home health agencies, nursing homes, and ambulatory surgery centers. Many problems may occur when the entity is being defined. One cause of problems occurs when the legal and accounting entities differ. This may happen when a physician owns a private clinic. The physician’s clinic operation and personal resources may operate using different accounting entities. In this example, the accounting entity must be clear and concise when it is defined, or the financial information can be mislead or useless (Cleverly, Song, & Cleverly, 2011).
The second principle is Money Measurement....