Generally Accepted Accounting Principles (GAAP)

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1. Explain Generally accepted accounting principles (GAAP)?
Generally accepted accounting principles (GAAP) are the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards or standard accounting practice.
The following is a list of the ten main accounting principles and guidelines together with a highly condensed explanation of each.
a. Economic Entity Assumption
The economic entity principle states that the recorded activities of a business entity will be kept separate from the recorded activities of its owner(s) and any other business entities. This means that you must maintain separate accounting records and bank accounts for each entity, and not intermix with them
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Under time period assumption, we prepare financial statements quarterly, half-yearly or annually. Theincome statement provides us an insight into the performance of the company for a period of time. Thebalance sheet (also known as the statement of financial position) provides us a snapshot of the business ' financial position (assets, liabilities and equity) at the end of the time period. The statement of cash flows and the statement of changes in equityprovide detail of how the company 's financial position changed during the time period. One implication of the time period assumption is that we have to make estimates and judgments at the end of the time period to correctly decide which events need to be reported in the current time period and which ones in the…show more content…
It is because of this basic accounting principle that numerous pages of "footnotes" are often attached to financial statements. As an example, let 's say a company is named in a lawsuit that demands a significant amount of money. When the financial statements are prepared it is not clear whether the company will be able to defend itself or whether it might lose the lawsuit. As a result of these conditions and because of the full disclosure principle the lawsuit will be described in the notes to the financial statements. A company usually lists its significant accounting policies as the first note to its financial
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