THE ISLAMIA UNIVERSITY OF BAHAWALPUR

NEW CAMPUS, BAHAWALPUR.

(DEPARTMENT OF MANAGEMENT SCIENCES)

ONLINE ASSIGNMENT

 Subject: Corporate Finance

 Class: MS (Management Sciences)
 Semester: 2nd
 Section: B
 Specialization Finance
 Topic: GAAP Principles

SUBMITTED TO:

 Honourable Supervisor,

Ms. Mehwish Yamin

Management Sciences Departt
I.U.B Bahawalpur.
SUBMITTED BY:

 Name: Naveed Ahmad

 Registration: F20-BMGMT-3E-03075
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
(1) INTRODUCTION: GAAP is short for Generally
Accepted Accounting Principles. GAAP is a cluster of
accounting standards and common industry usage that
have been developed over many years. It is used by
organizations to:
(a) Properly organize their financial information into
accounting records;
(b) Summarize the accounting records into financial
statements; and
(c) Disclose certain supporting information.

One of the reasons for using GAAP is so that anyone

reading the financial statements of multiple companies
has a reasonable basis for comparison, since all
companies using GAAP have created their financial
statements using the same set of rules.

(2) MEANING: According to Online website of Corporate

Financial Institute,
“GAAP, or Generally Accepted Accounting Principles, is a
commonly recognized set of rules and procedures
designed to govern corporate accounting and financial
reporting. The US GAAP is a comprehensive set of
accounting practices that were developed jointly by the
Financial Accounting Standards Board (FASB) and the
Governmental Accounting Standards Board (GASB), so
 they are applied to governmental and non-profit
accounting as well”.
(3) DEFINITION: “Generally Accepted Accounting
Principles (GAAP or US GAAP) are a collection of
commonly-followed accounting rules and standards for
financial reporting”.
In other words,
Generally Accepted Accounting Principles (GAAP), are a
set of rules that encompass the details, complexities, and
legalities of business and corporate accounting. The
Financial Accounting Standards Board (FASB) uses GAAP
as the foundation for its comprehensive set of approved
accounting methods and practices.
(4) GAAP TOPICS: GAAP covers a broad array of topics,
including the following:
(i) Financial statement presentation
(ii) Assets
(iii) Liabilities
(iv) Equity
(v) Revenue
(vi) Expenses
(vii) Business combinations
(viii) Derivatives and hedging
(ix) Fair value
(x) Foreign currency
(xi) Leases
(xii) Nonmonetary transactions
 (xiii) Subsequent events
(xiv) Industry-specific accounting, such as airlines,
extractive activities, and health care

The industry-specific accounting that is allowed or

required under GAAP may vary substantially from the
more generic standards for certain accounting
transactions.

(5) CORE GAAP PRINCIPLES: GAAP is set forth in ten

(10) primary principles, as follows:
(I) Principle of Consistency: This principle ensures
that consistent standards are followed in financial
reporting from period to period.
This principle requires that accounting practices
should remain unchanged from one period to
another. For example, if the stock is valued at cost or
market price whichever is less, this principle should
be followed year after year.
(II) Principle of Permanence of Methods: This
principle is closely related to principle of consistency
as the focus of this principle is that there should be
a consistency in the procedures used in financial
reporting.
The underlying reason behind this principle is that
consistent procedures and practices being applied in
accounting and financial reporting allows
comparison.
(III) Principle of Non-Compensation: This principle
states that all aspects of an organization’s
performance, whether positive or negative, are to be
reported. In other words, it should not compensate
(offset) a debt with an asset. In nutshell;
The full details of the financial information should be
disclosed including negatives and positives. This
should be done without the expectation of debt
compensation by an asset or revenue by an expense.
(IV) Principle of Prudence: According to this principle,
the financial data representation should be done “as
it is” and not based on any speculation. Hence, all
reporting of financial data is to be factual,
reasonable, and not speculative.
(V) Principle of Regularity: This principle means that
all accountants are to consistently abide by the
GAAP. In short words,
This principle states that the accountant has
complied to the GAAP rules and regulations.
(VI) Principle of Sincerity: As per this principle, the
accountant should provide the correct depiction of
the financial situation of a business.
Furthermore, this principle requires that
accountants must remained committed to accuracy,
honesty and impartiality in the presentation of
accounting information.
 (VII) Principle of Utmost Good Faith: This principle
asserts that anyone involved in financial reporting is
expected to be acting honestly and in good faith. All
involved parties in business transactions, are
assumed to be acting honestly.
(VIII) Principle of Materiality: According to this
principle, only those events or items should be
recorded which have a significant impact and
insignificant things should be ignored, as it will
assist in financial reporting regarding clearly
disclosure of the organization’s genuine financial
position.
(IX) Principle of Continuity: This principle states that
all asset valuations in financial reporting are based
on the assumption that the business or other entity
will continue to operate going forward.
(X) Principle of Periodicity: According to this principle,
the life of business is divided into appropriate
segments for studying the results shown by the
business after each segment.
Once the time period has been established,
accountants use GAAP to record and report that
accounting period's transactions.
(6) IMPORTANCE: Generally Accepted Accounting
Principles make financial reporting standardized and
transparent, using commonly accepted terms, practices,
and procedures. The consistency of presentation of
 financial reports that results from GAAP makes it easy for
investors and other interested parties (such as a board of
directors) to more easily comprehend financial statements
and compare the financial statements of one company
with those of another company.
GAAP also seeks to make non-profit and governmental
entities more accountable by requiring them to clearly
and honestly report their finances.
In short, GAAP is designed to ensure a consistent
presentation of financial statements, making it easier for
people to read and comprehend the information contained
in the statements.
(7) CONCLUSION: Generally accepted accounting
principles (GAAP) refer to a common set of accounting
principles, standards, and procedures issued by the
Financial Accounting Standards Board (FASB). Public
companies in the United States must follow GAAP when
their accountants compile their financial statements.
GAAP is a combination of authoritative standards (set by
policy boards) and the commonly accepted ways of
recording and reporting accounting information. GAAP
aims to improve the clarity, consistency, and
comparability of the communication of financial
information.
GAAP may be contrasted with pro forma accounting,
which is a non-GAAP financial reporting method.
Internationally, the equivalent to GAAP in the United
States is referred to as International Financial Reporting
Standards (IFRS). IFRS is followed in over 120 countries,
including those in the European Union (EU).