Generally Accepted Accounting Principles (GAAP)


Generally Accepted Accounting Principles (GAAP):

Generally accepted accounting principles (GAAP) are those principles that have substantial authoritative support. The AICPA’s code of professional conduct requires that members prepare  financial statements in accordance with generally accepted accounting principles (GAAP). Specifically rule 203 of this code prohibits a member from expressing an opinion that financial statements conform with GAAP if those statements contain a material departure from GAAP, unless the member can demonstrate that because of usual circumstances the financial statements would other wise have been misleading. Failure to follow rule 203 can lead to loss of a CPA’s license to practice.

Definition and Explanation of Generally Accepted Accounting Principles (GAAP):

The meaning of GAAP is defined by statement of auditing standards (SAS) NO.69, “The meanings of ‘present fairly in conformity with generally accepted accounting principles’ in the independent auditor’s report.” Under this standard, GAAP covered by rule 203 are construed to be FASB standards and interpretations, APB opinions, and AICPA accounting research bulletins. Often however, a specific accounting transaction occurs that is not covered by any of these documents. In this case, other authoritative literature is used. Major examples are: FASB technical bulletins, AICPA industry auditing and accounting guides; and considered to have substantial authoritative support because the recognized professional bodies, after giving interested and affected parties the opportunity to react to exposure drafts and respond at public hearing, have voted their issuance. If these pronouncements are lacking in guidance, then other sources might be considered. If the accounting treatment of an event is not specified by a category. The hierarchy of these sources is presented in the example Below. If the accounting treatment of an event is not specified by a category (a) pronouncement, then categories (b) through (d) should be investigated. If there is a conflict between pronouncements in (b) through (d), the higher category is to be followed. For example, (b) is higher than (c). If non of these pronouncements addresses the event, the support is sought from other accounting literature. Examples of accounting literatures include FASB concepts statements, International Accounting Standards, and Accounting articles.

House of GAAP

Category (d)

AICPA Accounting Interpretations

FASB Implementation Guides (Q & A)

Widely recognized and prevalent industry practices

Category (c)

FASB Emerging Issues Task Force

AICPA AcSEC Practice Bulletins

Category (b)

FASB Technical Bulletins

AICPA Industry Audit and Accounting Guides

AICPA Statement of Position

Category (a)

FASB Standards and Interpretations

APB Opinions

AICPA Accounting Research Bulletins

You may also be interested in other useful articles from “introduction to managerial accounting chapter”:

  1. What is managerial accounting?

  2. Difference between financial and managerial accounting (Financial accounting vs managerial accounting).

  3. Need for managerial accounting information.

  4. History of managerial accounting.

  5. Code of conduct for management accountants.

  6. The certified management accountants (CMA).

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