Generally Accepted Accounting Principles (GAAP)
Theory base of accounting comprises concepts, conventions, principles, rules, standards and guidelines developed, to provide uniformity and consistency to accounting records and enhance its utility, to various users of accounting information. It helps us understand the basics of accounting and also brings uniformity and consistency in the financial statements. Theory of Accounting includes:
- Generally Accepted Accounting Principles (GAAP)
- Basic Accounting Concepts
- Systems of Accounting – Single Entry System
- Basis of Accounting
- Accounting Standards
Let us understand these one by one.
Generally Accepted Accounting Principles (GAAP):
Generally Accepted Accounting Principles (GAAP) refers to the rules or guidelines adopted all over the world for recording and reporting of business transactions.
These are adopted to bring uniformity and consistency in the preparation and the presentation of financial statements by accountants. In simple words GAAP is a global language of accounting professionals.
GAAP also gives assurance to the management that accounting statements are not manipulated if GAAP rules are followed religiously. And hence presented accounts are fair enough to take some major managerial decisions.
Different countries and other organisations can modify the GAAP standards to suit the specific needs of their industries and economies. Like in India, Indian Accounting Standards (IAS) are issued by the Institute of Chartered Accountants of India (ICAI). They are based on and adapted from the GAAP with modifications necessary for the Indian industries and other factors. There are 32 Indian Accounting Standards.
Many countries around the world have adopted the International Financial Reporting Standards
Thus, generally accepted accounting policies are rules to ensure consistency among different financial statements.