Generally accepted accounting principle (GAAP)

During the past 50 years the contribution of the United States to accounting theory has been tremendous. Different committees, associations and institutes have based upon researches conducted, made pronouncements from time to time to develop and improve the principles which are commonly known as Generally Accepted Accounting Principles (GAAP) in the United States. These include broad concepts, guidelines, conventions, rules and procedure at any given time. An underlying structure of concepts, techniques and conventions provides a basis for accounting practice. Three major measurement conventions are realisation, matching and stable monetary unit. The accrual basis is the heart of accounting whereby revenues are recognized as earned and expenses as incurred rather than as related cash is received or disbursed.

Every business enterprise in USA prepares its financial statements in accordance with the GAAP. The GAAP are guidelines for specific accounting issues, which are to be followed for the preparation of financial statements. These financial statements are audited by the auditors who certify that the financial statements have been prepared in accordance with GAAP.

US GAAP are more prescriptive and detailed than accounting standards in other countries. The volume and complexity of different standards under GAAP is very large as indicated below:

Statements of the Financial Accounting Standard Board (FASB) – 138 Nos.

• FASB Interpretations – 44 Nos.
• FASB Statement of Financial Accounting concepts – 7 Nos.
• FASB Technical Bulletins – about 100 Nos.
• Opinions of the Accounting Principle Board
• Research Bulletins of the American Institute of Certified Public Accountants (AICPA) – 51 Nos.
• AICPA Industry Audit and Accounting Guidelines.
• AICPA Statement of position
• AICPA Accounting Interpretations – 30 Nos.

Financial Statements as per US GAAP comprised of income statement, balance sheet, earning per share statement, and statement of shareholders’ equity and cash flow statement. These statements are prepared on consolidated basis for a parent company. Comparative information is provided in the balance sheet for preceding two financial periods and in the income statement, cash flow statement and statement of shareholders’ equity for one preceding financial period.