Matching Principle: If you incur an expense, it should be matched with the revenues, according to the accrual principle.Going Concern: The accountant assumes that your business will continue its operations in the foreseeable future.Full Disclosure Principle: You have to report all the relevant information of the business in the financial statements or in the footnotes.Cost Principle: If you buy an item in 1980 at $100, it will be reported on your balance sheet as worth $100 today, independently on inflation or appreciation of the asset.Time Period Assumption: Business activity you undertake can be reported in separated time intervals, such as weeks, months, quarters or fiscal years.Monetary Unit Assumption: The Business activity you undertake is considered in US Dollars.Economic entity assumption: If you have a business, even if you are a sole proprietor, the accountant will consider yourself separately from your business.Finally, the first set of GAAP was created and in 1973 and the CAP board was substituted by the Financial Accounting Standards Board (FASB).įrom this work came out 10 basic principles, that are the foundation of the modern accounting system in US: The AIA subsequently instituted an organism to specifically create these principles: The Committee on Accounting Procedure (CAP). In 1934, the SEC, assisted by the American Institute of Accountants (AIA), started to work on the GAAP. In the decade after the 1929 market crash institutions such as the Securities and Exchange Commission were created. Indeed, after the 1929 market crash,Īmerican government felt the necessity to create a set of rules to discipline and conform the accounting system, and avoid what had happened. Today we have two main accepted frameworks, globally: GAAP and IFRS in this chapter I will focus mainly on GAAP. The general accepted accounting principles are standards and procedures used by organizations to submit their financial statements. GAAP PrinciplesĪlthough, the fundamental accounting system hasn’t changed, the principle and rules applying today have been updated in the last century. If you either own a small business, or you are a CFO, CEO, COO, a common citizen, you have to understand accounting to recognize what is behind each one of the 14 trillions transactions per day, just in US. This practical manual gave official birth to a system that is still used in current accounting.Įven people who hate accounting recognize the importance of it. Born in 1494, when a Venetian Merchant, Luca Pacioli, in his “Summa de Arithmetica, Geometria, Proportioni et Proportionailta”, described for the first time the double entry-system. The current accounting system is one of the few survivors. In a globalized world, where change happens so quickly that companies that existed for centuries – such as Lehman Brothers, founded in 1850, bankrupted in 2008 – just few things stick for centuries.
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