The United States Generally Accepted Accounting Principles, also known as USGAP, are the foundation of financial accounting for business entities in the United States. When we refer to GAP, we are referring to all those accounting principles, standards, and procedures that govern the preparation of financial statements. The Financial Accounting Standards Board, FASB, is the organization that develops, establishes, and communicates these standards of financial accounting and reporting in the United States.
While FASB develops standards, the Securities and Exchange Commission, SEC, actually regulates financial reporting and disclosures by public companies in the United States. All publicly traded entities are required to submit their audited financial statements to the SEC quarterly and annually. The SEC also monitors the Public Company Accounting Oversight Board, PCAOB, which is an entity created by Congress as a component of the Sarbanes-Oxley Act of 2002. The PCAOB oversees the audits of public companies to protect the interests of investors. These organizations work in unison to ensure that financial information is faithfully represented.
The notion of faithful representation rests on seven... Key Concepts of US GAAP Concept number 1 The Business Entity Concept, also known as the Economic Entity Assumption This concept defines a sort of accounting border around the business to ensure the financial information for transactions made by the business is reported separately from transactions of the owners of the business or any other affiliated business entity. Concept number 2 is the Cost Principle Under the cost principle, all business transactions must initially be recorded at historical cost.
This principle effectively implements a conservative approach to the financial statements. If, for example, the value of an asset on the balance sheet increases over time, the company is still required to carry that asset at cost on the balance sheet. Concept number three is the objectivity concept. The Objectivity Concept states that all accounting records should be free of bias.
In other words, financial information should not be misleading, but objective and verifiable. Concept number 4 is the Monetary Unit Concept. The Monetary Unit Concept states that all transactions must be expressed as a currency, such as the US dollar.
Concept number 5 is the Revenue Recognition Principle. The revenue recognition principle determines when revenue is recorded. This is particularly important because the timing of revenue recognition has a direct impact on a company's bottom line.
Concept number six is the accounting period concept. The accounting period concept provides that transactions should be recorded in the period in which they occurred. Concept number seven is the matching principle.
The matching principle is an effort to ensure that expenses are recognized at the same pace as the revenue that those expenses help generate.