Accounting are Three Activities Identification, Recording, and Communication. The accounting process includes the bookkeeping function. Accounting data user are –Marketing, Management, Finance, Human Resources, Creditors & Investors. There are general rules and concepts that govern the field of accounting. These general rules–referred to as basic accounting principles and guidelines–form the groundwork on which more detailed, complicated, and legalistic accounting rules are based. For example, the Financial Accounting Standards Board (FASB) uses the basic accounting principles and guidelines as a basis for their own detailed and comprehensive set of accounting rules and standards.
The phrase “generally accepted accounting principles” (or “GAAP”) consists of three important sets of rules: (1) the basic accounting principles and guidelines, (2) the detailed rules and standards issued by FASB and its predecessor the Accounting Principles Board (APB), and (3) the generally accepted industry practices. Various users need financial information Financial Statements:-Balance Sheet, Income Statement, Statement of Owner’s Equity, Statement of Cash Flows, Note Disclosure.
The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. Generally Accepted Accounting Principles (GAAP) – A set of rules and practices, having substantial authoritative support that the accounting profession recognizes as a general guide for financial reporting purposes. If a company distributes its financial statements to the public, it is required to follow generally accepted accounting principles in the preparation of those statements. Further, if a company’s stock is publicly traded, federal law requires the company’s financial statements be audited by independent public accountants. Both the company’s management and the independent accountants must certify that the financial statements and the related notes to the financial statements have been prepared in accordance with GAAP.
GAAP is exceedingly useful because it attempts to standardize and regulate accounting definitions, assumptions, and methods. Because of generally accepted accounting principles we are able to assume that there is consistency from year to year in the methods used to prepare a company’s financial statements. And although variations may exist, we can make reasonably confident conclusions when comparing one company to another, or comparing one company’s financial statistics to the statistics for its industry. Over the years the generally accepted accounting principles have become more complex because financial transactions have become more complex. Selection of which principle to follow generally relates to trade-offs between relevance and faithful representation.
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