Generally Accepted Accounting Principles (GAAP) are widely recognized accounting rules that aim to standardize accounting practices globally, providing a framework for consistent financial reporting. GAAP is characterized by its nature of flexibility, regulatory requirements, and the ability to reduce fraud while promoting a better understanding of financial statements. However, it faces challenges such as inflexibility, lack of uniformity across industries, and the potential for confusion due to the diversity of terms and standards used.

1. Sanjoy19 July 31, 2020
Generally Accepted Accounting Principles
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Introduction of Generally Accepted Accounting Principles: These widely
accepted accounting principles that are generally recognized by almost all the persons
associated withaccounting along with representation of accepted accounting practices
are known as ” Generally Accepted Accounting Principles”.
It is the summation of all theories, doctrine, conventions, or principles closely related to
the accounting which got global recognition.
Learning Objectives: Generally Accepted Accounting Principles.
After studying this unit,you will be able to:
Generally Accepted Accounting Principles
Meaning of Generally Accepted Accounting Principles :
Generally Accepted Accounting Principles are accounting rules and
directive guidelines which have been generally accepted by the accounting bodies
and institutes of different countries. Accounting practices in the different parts of the
world cannot be exactly the same.
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2. Some differences exist due to geographical differences in regional customs and
conventions. These differences lead to controversies. The accounting language inbound
to be differents far as it expresses information through accounts prepared by the
different accountants.
To avoid these problems and to make accounting meaningful in the same way to all,
concurrence of opinion has been established by developing some definite principles.
These principles have been needing the evaluation of accounting practices undertaken
globally.
GAAPs include the broad framework of guidelines for general application and the
detailed and contemporary practices and procedures to be followed in a particular
country. The APB Statement (No.4) defines GAAP as “the convention’s rules and
procedures necessary to define accepted accounting practice at a particular time.
‘the standard of generally accepted accounting principles includes not only broad
guidelines of general application but also detailed practices and procedures.”
At present a mentions in his report that the financial statement checked by him have
been prepared in accordance with GAAP.
History of the EVOLUtion of GAAPs:
The scrutiny of the Great Depression in the USA disclosed that different accounting
policies were being pursued by different companies. The Securities and Exchange
Commission (SEC) and the AICPA’s Committee on Accounting Procedures
(CAP) pointed out the effects of these anomalies. USA set up in 1973 the Financial
Accounting Statement Broad (FASB).
It tried to develop some generally accepted rules and procedures. The International
Accounting Standards Committee (IASC) started issuing a statement advocating
some standard accounting Principles.
In India, the Accounting Standard (AS) of the Institute of Chartered Accountants of
India, the Standard of Auditing Practice [* with the nomenclature recently
changed], notifications made by the Central Government as AS IT, Companies Act,
etc, are contributing to the framework of GAAP.
Nature or Characteristics of Generally Accepted Accounting
Principles :
1. Generally Accepted Accounting Principles provides the structural base of
accounting. The object is to eliminate the diversity of accounting practices and to
introduce some common code of action.
2. There are different sources of GAAP. The common accounting practices, the
Accounting Standard, the Auditing Standard, the legal provisions, the directives issued
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3. by the regulatory bodies, etc. contribute to the framework of GAAP
3. Generally Accepted Accounting Principles is a combination of
contemporary accounting practices, rules, regulations, standards, etc. so, the
combination is no solitary concept but a collection of concepts.
4. GAAP is not rigid by nature. Endless uniformity cannot be ensured by GAAP.
Change of economic conditions and accounting situations make in-roads for substitute
policies and principles. By nature GAAP should be dynamic and flexible.
5. Generally Accepted Accounting Principles are regulatory in nature. The
accountants have to decide their courses of actions under the framework of GAAP. So,
compliance is a must among some definite alternatives. The accountant can not move
according to his own sweet will. Some experts consider GAAP to be authoritarian.
Importance/Objective of Generally Accepted Accounting
Principles :
1. According to the Accounting Principles Board, GAAP tries to reach a
consensus about :
i. The economic resources to be recorded as assets and liabilities.
ii. Changes in the above to be recorded.
iii. Time of recording such changes.
iv. Measurement of values and changes of assets and liabilities.
v. Information to be disclosed and made of disclosure.
vi. Financial statement to be prepared.
Thus, GAAP decides the nucleus of the fundamental accounting objectives.
2. GAAP provides consistency in financial reporting.
Advantages of Generally Accepted Accounting Principles:
Advantages of Generally Accepted Accounting Principles can be
diagrammatically represented as follows:
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4. Advantages of Generally Accepted Accounting Principles
The following advantages may be derived from GAAP.
1.Harmonization of Accounting Practices:
GAAP helps to remove disparity in accounting practices and policies adopted by
different concerns and bring consistency in reporting information in the financial
statements of all concerns.
This makes the inter-firm comparison meaningful and practicable. Consequently,
performance evaluation of the concern is possible.
2.Reduction of Fraud and Misrepresentation:
GAAP removes the possibility of alternative judgment in the preparation of Financial
Statements. As a result, the instance of fraud and misrepresentation in the financial
statement has come down considerably.
3. Standard of Accounting:
GAAP are the guidelines created with the collective wisdom and experience of the
professional experts. Therefore, adherence to GAAP brings certainty about the
betterment in the quality of accounting.
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5. 4. Facilitating quick recording of daily accounting work:
GAAP provides the accountant with handy rules for their quick recording of daily
accounting work. If feels confident and can be able to eliminate the wastage of time in
the deliberation regarding the accounting treatment of complex transactions. As a
result, the accountant can bring out the financial statement in proper time.
5. Development of International Capital Market:
GAAP provides the framework for the development of the operational activities of the
International Capital Market.
The operational activities of a firm can be evaluated on the basis of some Yardstick
followed globally. Therefore, it can easily mobiles funds from the international market.
6.Listing of Securities:
Listing of securities like Bonds, share, stock, etc. In the stock exchanges of foreign
countries is feasible only when the business firm has drawn their accounts as per the
international accounting standard.
If accounts are drawn by following international accounting standards, then their
credibility and acceptability are boosted up.
7.Defense against window-dressing:
The accountant can neutralize the pressure of preparation of window dressed financial
statements by the management under the umbrella of GAAP.
8. Decision for Investment:
Existing and prospective investors can make their investment decisions more rationally
and judiciously on the basis of GAAP which provides the ground for comparison among
the business firms.
On the basis of comparative analysis between the firms, the investors can chalk out their
investment plans about their selection of place of investment. Naturally, the investors
can easily decide where to invest and where from investment is to be withdrawn.
Moreover, the environment which is contributing towards efficient investment decision
is also helpful for the reduction of cost of financing.
Disadvantages of Generally Accepted Accounting Principles :
Disadvantages of Generally Accepted Accounting Principles can be
diagrammatically represented as follows:
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6. Disadvantages of Generally Accepted Accounting Principles
The following shortcomings are discovered from GAAP.
1. Inflexible Rules:
GAAP is formulated on the basis of specific circumstances. Once they are set, are
supposed to be strictly followed. However, due to the changing scenarios in the modern
dynamic business world, GAAP is gradually losing its effectiveness.
2. Lack of Uniformity:
Industries are diversified from each other. Even firms within the same industry also vary
in their size and operation. Again it is true that all the rules and principles are not
evenly applied to all the firms within the same industry. Hence it is quite difficult to
make accounting practices standardized on the basis of GAAP.
3. Formulation of GAAP:
Formulation of GAAP is not only expensive but also bureaucratic and time-consuming
factor. For its enforcement fund is also needed.
4. Politicization in Standard Setting:
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7. Frequently no specific standard has been prescribed for better accounting and
reporting. Cases are not rated where standards are set in the interest of a particular
group of people, or even rational standards are often withdrawn just to satisfy the
interest of a specific group of persons.
5. Interpretation facing problem:
Selection of standard are done by keeping in view the interests of the groups in the
standard-setting committee. Occasionally this will create ambiguity in the functioning
of the standard which may be difficult to interpret.
6.Inability to eliminate personal judgment:
Standards fail to eliminate the need for applying personal judgment in the preparation
of financial statements. As such, this can give complete assurance about the unique
measurement of particular kinds of transactions e.g.different methods of depreciation
may be suggested by different accountants.
7. Alternative course of action:
Accounting standards allow so many alternative courses of action relating to the
accounting treatment of many monetary events. As a result, the purpose of providing a
basis for comparable financial statements can not be easily attainable.
8. Contribution towards development of knowledge:
Standards are taken up as a ready-made code of accounting practices. This makes the
accountants lazy and inefficient to think and judge about matters of principle.
Quick Revision
Generally Accepted Accounting Principles :
Generally Accepted Accounting Principles is the summation of all theories, doctrine,
conventions, or principles closely related to accounting which got global recognition.
While discussing GAAP, we primarily stress on GAAP that exists today in the USA.
Financial Accounting Standard Board(FASB) of the USA is considered to be the
principal source of Generally Accepted Accounting Principles.
Since different countries in the world are diversified in terms of socio-economic
conditions, cultural and political backgrounds, and another setup, hence it is not
possible to have a single perfect method for measuring the performance of a concern
and as such each country has set up recognized accounting institution for prescribing
principles for sound accounting practices.
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8. In India, the Institute of Chartered Accountants of India (ICAI) is set for the purpose of
the formulation of most of the accounting principles.
At present, the accountants and the Government of different countries of the world have
come forward to co-ordinate their efforts in reducing international disparity.
Consequently, to move with the globalisation, all the leading countries of the world have
to decide to use a global accounting standard issued by the International Accounting
Standard Committee (IASC).
It has been playing a very significant role in the formation of GAAP for implementation
across the countries.
Disadvantages of GAAP :
1. GAAP invites choice among recommended alternatives. Different terms like
concepts, postulates, standards, etc. are introduced. These may create confusion
and the inability to make the right choice at the right place.
R.K. Mantz, in his writing “The place of Postulates in Accounting,” remarked that –
“There are those who find the multiplicity of terms confusing and distressing. Principles
concepts, postulates, rules, standards, conventions are perhaps just too much.
2. GAAP provides a regulatory code of action. But it is not uniformly followed by
every enterprise. Where the standards set by Regulatory Bodies and the provisions
of the important Acts fail to reach 9like a sole proprietorship concern),
compliance of GAAP does not remain compulsory.
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