Basic objectives
Financial reporting should be rich with information that is;
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.
- About economic resources, the claims and the changes in those resources.
- Key to make financial decisions.
- Provide information to make long-term decisions.
- Improving the performance of the business
- 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.
Assumptions
GAAP has four basic assumptions, four basic principles, and four basic constraints to achieve its basic objectives and implement fundamental qualities.
Assumptions
- 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.
Principles
- Historical cost principle - Companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities.
- Revenue recognition principle - Requires companies to record in accrual basis accounting.
- Matching principle - Expenses have to be matched with revenues.
- Full Disclosure principle - Information disclosed should be enough to make decisions.
Constraints
- Objectivity principle: The financial statements should be based on objective evidence.
- Materiality principle: The significance of an item should be reported when considering.
- Consistency principle: The company uses the same accounting principles and methods from year to year.
- Conservatism principle: When choosing between two solutions, the one that will be least likely to overstate assets and income should be picked.
