The Generally Accepted Accounting Principles, GAAP, were approved by the VII Inter-American Accounting Conference and the VII National Assembly of Graduates in Economics in Mar de Plata in 1965.
Generally Accepted Accounting Principles, GAAP:
Each of the accounting principles are shown and explained below, in a concrete and didactic way that will allow, through a series of examples, a much easier understanding by the reader.
1. Equity
Principle that says that all financial statements 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; which are: César, Manuel and Carlos. César has 45% of the shares, Manuel 35% and Carlos 20%. If profits amount to S /.100, César receives S /.45, Manuel S /.35 and Carlos S /.20. Therefore the profits of the shareholders are being distributed equitably.
2. Ente
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 corresponds to him in the company. In other words: "The company does not assume his personal expenses" because Jhon is considered a third party.
3. Economic Goods
Principle that establishes that economic assets are all those tangible and / or intangible assets 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 since it will bring more profit to the company if it acquires the brand.
On the material goods side, they would be the machinery of a company, which are valued at their acquisition price.
4. Common Currency
Principle that establishes that to register the financial statements a common currency must be had, which is generally the legal currency of the country in which the entity operates.
Example: A Peruvian company that produces sweaters registers its financial activities in Peruvian Nuevos Soles (S /.)
5. Going company
Principle by which it is assumed that the company whose financial activities are registered has a temporary operation validity with a projection to the future, unless there is good evidence to the contrary.
Example: A construction company has signed a business collaboration agreement (Join Venture) for two years with a heavy machinery company. If another construction company that has a 6-month construction job wants to ally itself with the first for the machines it owns, it can do so since the validity of two years of the contract that the 1st company has can be fully observed.
6. Exercise
It is also known by the name of period. This principle refers to the fact that management results are measured in equal time intervals, so that the results between exercise and exercise are comparable.
Example: The General Accounting Plan is measured every 12 months.
7. Objectivity
Changes in assets, liabilities, and equity should be objectively (properly) measured and recorded in the accounting records following all principles, as soon as possible.
Example: On August 29, 10 shares are bought at $ 10,000, however at the end of October your shares are only worth $ 8,000, but it is expected that at the end of the year they will cost $ 12,000. Therefore, to have an objective record, some adjustments must be made in the accounting and recorded on time.
8. Prudence
Also known as the principle of Conservatism. This principle says that economic events to be accounted for should not be underestimated or overestimated. In other words, when it is accounted for, the lowest value for the asset is always chosen.
Example: If 1 month ago, I bought a machine at $ 200 and the market now quotes it at $ 180. In accounting I must take the lowest value of the asset, that is $ 180.
9. Uniformity
As long as accounting principles are applicable in preparing financial statements, they should be used uniformly from year to year (from one period to another) so that they can be compared. Otherwise, it must be indicated by means of an explanatory note.
Example: The installments paid on a loan made by a company must be considered as expenses - which they are - in the corresponding fiscal year.
10. Exposure
This principle says that all financial statements must have all the information necessary to be able to properly interpret the financial situation of the entity to which they refer.
Example: A company delivers its financial statements to its shareholders with “all” the economic activities it has 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 count in its financial statements how many screws it has used to fix the machines within its factory. It's insignificant.
12. Valuation at cost
It is the main valuation criterion, which establishes that the assets and services that an entity has, must be recorded at their historical or acquisition cost. To establish this cost, the expenses in transport and fixing for its operation must be taken into account.
Example: The company COMPRO TODO SA acquired a machine to make cookies, which cost $ 3000, as they brought it from the USA, they spent $ 1200 on transportation and to fix and prepare the machine in the company for its operation they charged “$ 300. Therefore, in the financial statements of the company, the valuation of the machine will be $ 4,500.
13. Accrued
The equity variations (income or expenses) that are considered to establish the economic result are for one year (period) without considering whether they have already been collected or paid.
Example: I consume water in the month of January. The receipt arrives in February, therefore I pay it in February. However, I count the water consumption in January as an output, because that is where it was consumed.
14. Realization:
Economic results should only be accounted for when they are carried out through legal or commercial means (minutes, documents, etc.) where the inherent risks of any business are taken into account. The “promises or assumptions” are not found in this group since they do not take into account the risks and it is not known whether the terms of the business will be carried out or not. The concept 'realized' participates in the concept of accrued.
Example: Your friend closes a business with you, establishing the terms of the business and its risks. Therefore, this business can be accounted for since it complies with the principle of realization.
The principles are classified into four areas
Area 1. Principle: equity
The principle of equity is found in area 1, because it is the general and fundamental principle for the other principles.
Area 2. Principles: entity, economic assets, common currency, going concern, exercise.
These 5 principles are found in area 2, because they reflect the socioeconomic environment. In other words, these principles refer to everything that has to do with the company and the economic-social environment.
Area 3. Principles: objectivity, prudence, uniformity, exposure and materiality.
These principles are in relation to information, since they have to do with the collection, measurement, exposure and way in which the information is taken.
Area 4. Principles: valuation at cost, accrual, realization.
These principles are characterized by referring to the valuation, therefore it corresponds to everything related to payment commitments, collection and valuation of assets.
____________
The following video takes a tour of 15 generally accepted accounting principles.
