Generally Accepted Accounting Principles (GAAP) ensure financial statements are consistent, relevant, reliable, and transparent, facilitating informed decision-making by presenting a comprehensive and accurate view of a company’s financial performance.
Primary Implication
The accuracy and timeliness of your business transaction recording influence the quality of any business decision made about your business. Fail to record your business transactions accurately; you rob yourself of decisions getting made based on the best available financial information.
Avoid this failure by entering your business transactions for the previous week within a week of their occurring. Putting off recording your business transactions unnecessarily exposes you to reporting mistakes that will lead to poor decision-making and waste that leads to losses, not profits.
Overview
Understanding the core guiding principles of accounting helps you to understand better how to use your financial statements.
Consistency Principle says that once a company has defined how they are going to do the accounting and what accounting principles you are going to follow, you have to continue to use them year in and year out. This ensures the people comparing financial reports are making an apples-to-apples comparison, and financial results are changing due to performance issues, not changes in how the accounting is performed.
While this is the rule, this is not to say that a company can never change accounting methods and procedures. Everyone realizes that things change, and the accounting systems need to be flexible enough to react to and adapt to this change. However, when a change is necessary, it has to be fully disclosed, the financial impact clearly outlined, and at least the last three years of financial statements restated per the new methods. Hence, comparisons to the prior year’s results remain valid.
Materiality Principle says that anything that would materially affect the financial statements must be included and fully disclosed in the financial statements. The guiding principle is if a particular item were included or excluded, would this affect a reasonable person’s decision regarding the company’s financial performance.
Relevancy Principle says the financial statements must be prepared in such a way as to outline the company’s past performance, present condition, and future outlook so that intelligent decisions can be made promptly.
Reliable Information Principle says that financial statements must be verifiable and objective.