Generally Accepted Accounting Principles Essay

Generally Accepted Accounting Principles
The Standards issued by the policy-setting policies are known as the Generally Accepted Accounting Principles (GAAP). These principles address recognition, measurement and disclosure of economic activity. Recognition occurs when an entity records an item on the financial statements or source documents, measurement addresses how the item is recorded in the financial statement, and disclosure involves items that are not recorded in the financial statements. Accordingly, these principles provide the basis for the preparation of financial statements and allows for accurate financial reporting. Financial reporting includes the financial statements, the footnotes to the financial statement, also called “additional explanations”, and supplemental information. Supplemental information provides descriptive narratives to portray business activity, for example car dealers present the models sold.
A fundamental accounting principle is the Matching Principle which dictates that economic activities be recognized in the period in which they occur. Thus, in …show more content…
Relevance implies that users can relate information to decisions with predictive and confirmatory values. The predictive value is a characteristic that allows future events to be predicted from the elements in the financial statements. The confirmatory value provides for feedback to confirm or disconfirm predictions made in the past with the assistance of the published information. Faithful representation implies that users can depend on financial reporting if the financial statements are complete, neutral and free from material error. Completeness indicates that all facts are embedded in the information, neutrality suggests that the information is objectively balanced and non-biased, and free from material error occurs if sufficiently knowledgeable third parties would derive equal