Generally Accepted Accounting Principles Narrative Essay

Generally Accepted Accounting Principles (United States)

In the U. S. , generally accepted accounting principles, commonly abbreviated as US GAAP or simply GAAP, are accounting rules used to prepare, present, and report financial statements for a wide variety of entities, including publicly-traded and privately-held companies, non-profit organizations, and governments. Generally GAAP includes local applicable Accounting Framework, related accounting law, rules and Accounting Standard.

Similar to many other countries practicing under the common law system, the United States government does not directly set accounting standards, in the belief that the private sector has better knowledge and resources. US GAAP is not written in law, although the U. S. Securities and Exchange Commission (SEC) requires that it be followed in financial reporting by publicly-traded companies. Currently, the Financial Accounting Standards Board (FASB) is the highest authority in establishing generally accepted accounting principles for public and private companies, as well as non-profit entities.

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For local and state governments, GAAP is determined by the Governmental Accounting Standards Board (GASB), which operates under a set of assumptions, principles, and constraints, different from those of standard private-sector GAAP. Financial reporting in federal government entities is regulated by the Federal Accounting Standards Advisory Board (FASAB). The US GAAP provisions differ somewhat from International Financial Reporting Standards (IFRS), though former SEC Chairman Chris Cox set out a timetable for all U. S. companies to drop GAAP by 2016, with the largest companies switching to IFRS as early as 2009 Basic objectives Financial reporting should provide information that is:

1. useful to present to potential investors and creditors and other users in making rational investment, credit, and other financial decisions.
2. helpful to present to potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts.
3. about economic resources, the claims to those resources, and the changes in them.

Basic concepts

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

Assumptions

Accounting Entity: assumes that the business is separate from its owners or other businesses. Revenue and expense should be kept separate from personal expenses.

Going Concern: assumes that the business will be in operation indefinitely. This validates the methods of asset capitalization, depreciation, and amortization. Only when liquidation is certain this assumption is not applicable.

Monetary Unit principle: assumes a stable currency is going to be the unit of record.

The FASB accepts the nominal value of the US Dollar as the monetary unit of record unadjusted for inflation. •The Time-period principle implies that the economic activities of an enterprise can be divided into artificial time periods.

Principles

Cost principle requires companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities. This principle provides information that is reliable (removing opportunity to provide subjective and potentially biased market values), but not very relevant.

Thus there is a trend to use fair values. Most debts and securities are now reported at market values.

Revenue principle requires companies to record when revenue is (1) realized or realizable and (2) earned, not when cash is received. This way of accounting is called accrual basis accounting.

Matching principle.

Expenses have to be matched with revenues as long as it is reasonable to do so. Expenses are recognized not when the work is performed, or when a product is produced, but when the work or the product actually makes its contribution to revenue. Only if no connection with revenue can be established, cost may be charged as expenses to the current period (e. g. office salaries and other administrative expenses). This principle allows greater evaluation of actual profitability and performance (shows how much was spent to earn revenue). Depreciation and Cost of Goods Sold are good examples of application of this principle.

Disclosure principle.

Amount and kinds of information disclosed should be decided based on trade-off analysis as a larger amount of information costs more to prepare and use. Information disclosed should be enough to make a judgment while keeping costs reasonable. Information is presented in the main body of financial statements, in the notes or as supplementary information.

Constraints

Objectivity principle.

the company financial statements provided by the accountants should be based on objective evidence.

Materiality principle.

the significance of an item should be considered when it is reported. An item is considered significant when it would affect the decision of a reasonable individual. Consistency principle: It means that the company uses the same accounting principles and methods from year to year.

Prudence principle.

when choosing between two solutions, the one that will be least likely to overstate assets and income should be picked (see convention of conservatism).

Generally Accepted Accounting Principles (UK)

The Generally Accepted Accounting Practice in the UK, or UK GAAP, are the overall body of regulation establishing how company accounts must be prepared in the United Kingdom. This includes not only accounting standards, but also UK company law. What is referred to elsewhere as Generally Accepted Accounting Principles is in the UK referred to as Generally Accepted Accounting Practice. History Accounting standards derive from a number of sources. The chief standard-setter is the Accounting Standards Board (ASB), which issues standards called Financial Reporting Standards (FRS). The ASB is part of the Financial Reporting Council, an independent regulator funded by a levy on listed companies[1], and it replaced the Accounting Standards Committee (ASC), which was disbanded in 1990 following a number of criticisms of its work.

To the extent that the ASC's pronouncements, known as Statements of Standard Accounting Practice (SSAPs), have not been replaced by FRS, they remain in force.

Creation/Revision of Standards

The ASB has a formal exposure process for proposed standards. Early concepts are issued as Discussion Papers. These are released to the public and comments invited. Where a new standard is to be proposed, a Financial Reporting Exposure Draft (FRED) is released for comment. The standard in final form is only issued when comments have been incorporated or addressed.This aims to address the criticisms levelled at the ASC, whose comment process was less rigorous. Issues that require an immediate solution are considered by the Urgent Issues Task Force (UITF). The UITF  comprises a number of senior figures from industry and accounting firms. It meets as necessary to consider pressing issues and issues Abstracts which become binding immediately.

Legislation

The principal legislation governing reporting in the UK is laid down in the Companies Act 2006, which incorporates the requirements of European law. The Companies Act sets out certain minimum reporting requirements for companies and, for example, requires limited companies to file their accounts with the Registrar of Companies who makes them available to the general public. From 2005, this framework changed as a result of European law requiring that all listed European companies report under International Financial Reporting Standards (IFRSs). In the UK, companies which are not listed have the option to report either under IFRSs or under UK GAAP.

Recently issued UK FRSs have, in any case replicated the wording of corresponding IFRSs, reducing the differences between the two sets of standards significantly. China Accounting Standards From Wikipedia, the free encyclopedia (Redirected from Chinese Accounting Standards) Jump to: navigation, search Chinese accounting standards are the accounting rules used in Chinese state owned corporations in mainland China. They are currently being phased out in favour of Generally Accepted Accounting Principles or International Accounting Standards.

As of February 2010, the Chinese Accounting Standard Systems is composed of Basic Standard, 38 specific standards and Application Guidance. Chinese accounting standards are unique because they originated in a socialist period in which the state was the sole owner of industry. Therefore unlike Western accounting standards, they are less a tool of profit and loss and an inventory of assets available to a company. In contrast to a Western balance sheet, Chinese accounting standards do not include an accounting of the debts that a corporation holds, and are less suitable for management control than for accounting for tax purposes.

This system of accounting is widely considered to be unsuitable for managing corporations in a market economy. As a result, Chinese corporations are gradually moving toward International Financial Reporting Standards. This has proven to be a massive undertaking. As a consequence Chinese companies who offer shares for sale in the United States used to be required to prepare three sets of statements, one using Chinese accounting standards (China GAAP), one using international standards (IFRS), and one using North American GAAP standards (US GAAP).

However, since 2008 the U. S. Securities and Exchange Commission (SEC) allows foreign private issuers to use financial statements prepared in accordance with IFRS. However, in recent years, The Finance Department of Chinese Government has issued new Chinese Accounting Standards which converge into IFRS and the similarity is almost 90-95%. The translation cost has been reduced greatly because of this measure

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