Basics of Generally Accepted Accounting Principles (GAAP)

Basic objectives

  • Financial reporting should be rich with information that is
  • Useful to provide information to potential investors and creditors and other financial market users in making rational investment, credit, and other financial decisions.
  • Helpful to assess the amounts, timing, and uncertainty of prospective cash receipts.
  • Key to make financial decisions.
  • About economic resources, the claims and the changes in those resources.
  • Improving the performance of the business
  • Provide information to make long-term decisions.
  • Useful in maintaining records

Basic concepts

GAAP has four basic assumptions, four basic principles, and four basic constraints to achieve its basic objectives and implement fundamental qualities.


  • Accounting Entity: Business has a separate existence from its owners and revenue and expense should be kept separate from personal expenses.
  • Going Concern: Business will be in operation indefinitely.
  • Monetary Unit principle: Assumes a stable currency is going to be the unit of record.
  • Time-period principle: Economic activities of a business can be divided into artificial time periods.


  • Historical cost principle – Companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities.
  • Matching principle – Expenses have to be matched with revenues.
  • Full Disclosure principle – Information disclosed should be enough to make decisions.
  • Revenue recognition principle – Requires companies to record in accrual basis accounting.


  • Objectivity principle: The financial statements should be based on objective evidence.
  • Conservatism principle: When choosing between two solutions, the one that will be least likely to overstate assets and income should be picked.
  • Consistency principle: The company uses the same accounting principles and methods from year to year.
  • Materiality principle: The significance of an item should be reported when considering.

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