GAAP: 14 Accounting Principles Explained
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ScribdTranslationsGAAP: 14 Accounting Principles Explained
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ScribdTranslationsGenerally Accepted Accounting Principles, GAAP.
Examples
The Generally Accepted Accounting Principles, GAAP, were approved by the VII conference.
Inter-American Accounting and the VII National Assembly of Graduates in Economic Sciences in Mar del Plata
in 1965. The Generally Accepted Accounting Principles, GAAP:
Equity
A principle that states that every financial statement must reflect the equity between opposing interests, which...
are at stake in a given company or entity.
Example: In a company, there are 3 partners; they are: César, Manuel, and Carlos. César has 45% of the
shares, Manuel 35% and Carlos 20%. If the profits amount to S/.100, César receives S/.45, Manuel
S/.35 and Carlos S/.20. Therefore, they are equally distributing the shareholders' profits.
2. Duck
Financial statements always refer to an entity where the owner is considered a third party.
Example
Mr. Jhon owns a record label. Jhon wants to buy a house on the beach, for that he spends the
salary that he is entitled to in the company. In other words: "The company does not assume its expenses"
"personals" because Jhon is considered as third.
3. Economic Goods
Principle that establishes that economic goods are all those material and/or immaterial goods.
that can be valued in monetary terms.
Example: As an immaterial asset, it can be the ADIDAS brand, which is recognized and preferred by the public.
therefore it can be valued in monetary terms as it will bring more profits to the company if it acquires
the brand.
On the side of material goods, it would be the machinery of a company, which are valued by their price.
of acquisition.
4. Common Currency
Principle that establishes that to record financial statements a common currency must be used, which
it is generally the legal currency of the country in which the entity operates.
Example: A Peruvian company that produces sweaters records its financial activities in new soles.
Peruvians (S/.)
5. Company in progress
Principle by which it is assumed that the company being recorded for its financial activities has continuity.
of temporary operation with a projection to the future, unless there is good evidence of what
opposite.
Example: A construction company has signed a business collaboration contract (Joint Venture) for
two years with a heavy machinery company. If another construction company has a job of
A 6-month construction company wants to ally with the first one because of the machines it possesses, it can do so since
The two-year term of the contract held by the first company can be fully observed.
6. Exercise
It is also known as the period. This principle refers to the results of the management
they are measured at equal time intervals, so that the results between each exercise are
comparables.
Example: The measurement of the General Accounting Plan is carried out every 12 months.
7. Objectivity
Changes in assets, liabilities, and equity must be measured and recorded objectively.
appropriately in the accounting records following all principles, as soon as possible.
Example: On August 29, 10 shares are purchased at $10,000; however, by the end of October.
his actions are only worth $8000, but they are expected to be worth $12000 by the end of the year. Therefore,
To have an objective record, some adjustments must be made in accounting and recorded on time.
Prudence
Also known as the principle of Conservatism. This principle states that one should not underestimate or
overestimate the economic facts that are going to be accounted for. That is to say, when accounting is done, it always
the lowest value for the asset is chosen.
Example: If one month ago, I bought a machine for $200 and the market now quotes it at $180. In accounting
I must take the lower value of the asset, that is $180.
Uniformity
As long as the accounting principles are applicable for preparing the financial statements, they must be
used uniformly from exercise to exercise (from one period to another) so that they can be compared. In
Otherwise, it must be indicated by means of a clarifying note.
Example: The payments made on a loan taken out by a company must be considered as
expenses - which are - in the corresponding exercise.
10. Exhibition
This principle states that every financial statement must have all the necessary information to be able to interpret.
adequately the financial situation of the entity they are referring to.
Example: A company delivers its financial statements to its shareholders with 'all' activities
economic analyses that have been carried out, so that they can interpret it.
11. Materiality
This principle establishes that transactions of little significant value should not be taken into account.
because they do not alter the final result of the financial statements.
Example: A company is not going to account in its financial statements how many screws it has used to
Fix the machines inside your factory. It is insignificant.
12. Cost Valuation
It is the main valuation criterion, which establishes that the assets and services that an entity has must be
register at its historical or acquisition cost. To establish this cost, the following must be taken into account
transportation and setting costs for its operation.
Example: The company COMPRO TODO S.A. purchased a machine to make cookies, which cost
$3000, since it was brought from the USA, $1200 was spent on transportation and to fix and prepare the machine in the
company for its operation charged '$300. Therefore, in the financial statements of the company, the
The valuation of the machine will be $4500.
13. Earned
The patrimonial variations (income or expenses) that are considered to establish the result.
economic pertains to an exercise (period) without considering whether they have already been collected or paid.
Example: I consume water in the month of January. The bill arrives in February, so I pay it in February. Without
I account for the water consumption in January as an expense because that is when it happens.
consumed.
14. Implementation
Economic results should only be accounted for when they are realized through legal means.
or commercial (minutes, documents, etc.) where the inherent risks of everything are taken into account
business. The 'promises or assumptions' are not found in this group as they do not take the risks into account
and it is not known whether the terms of the deal will be carried out or not. The concept of 'realized' is related to the concept
of accrued.
Example: Your friend closes a deal with you, establishing the terms of the deal and the risks of it.
the same. Therefore, this transaction can be accounted for as it complies with the realization principle.