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GAAP: Generally Accepted Accounting Principles and GAAP Accounting Rules, Principles, Assumptions

3 basic accounting principles

Accountants also develop and manage financial systems and help plan the firm’s financial strategy. The accounting equation states that the total of assets of an organization is always equal to the total of its owners’ and outsiders’ claims. These claims or equity of the firm’s owners is also known as Capital or Owner’s Equity, and the outsiders’ claims are known as Liabilities or Creditors’ Equity. For example, Rohan started a business by investing a sum of ₹1 crore. This amount will increase the cash of the business, and will also increase its capital by the same amount, i.e., ₹1 crore. Therefore, the effect of the transaction will be shown in two accounts, i.e., cash and capital account.

When a customer buys a pair of jeans, you must also count the expense of the materials to make them. The expense to make the pair of jeans must match the revenue earned from selling them. When businesses apply the revenue, expense, and matching principles, they are operating under the accrual accounting method.

Basic Accounting Concepts or Accounting Assumptions

It focuses on the consistency with which methods and policies are applied in the preparation of financial information during each period. Any changes that occur in methods and policies should be documented within the financial statements. Businesses are expected to be consistent when following certain principles unless there occurs a better functional one. It’s essential to keep in mind all these small details of the whole picture to provide your business with up-to-date information about the accounting process.

3 basic accounting principles

Assets describe an individual or company’s holdings of financial value. Accounting is the process of tracking and recording financial activity. People and businesses use the principles of accounting to assess their financial health and performance. Accounting also serves as a useful way for people and companies to honor their tax obligations.


The importance of GAAP lies in the uniformity, comparability, and transparency of financial documents. Without these standards and practices, businesses could publish their reports differently, creating discrepancies, confusion, and potential opportunities for fraud. The table below presents IBM’s fourth-quarter earnings report from 2016.

In Europe and elsewhere, International Financial Reporting Standards are established by the International Accounting Standards Board . Generally accepted accounting principles are uniform accounting principles for private companies and nonprofits in the U.S. These principles are largely set by the Financial Accounting Standards Board , an independent nonprofit organization whose members are chosen by the Financial Accounting Foundation. Accountants and other financial real estate bookkeeping professionals use GAAP rules and standards to organize and present the financial reporting periodically required by publicly traded companies within the U.S. Beyond these 10 general principles, public U.S. companies adhering to GAAP are expected to observe the following four additional guidelines to support the consistency and accuracy of financial statements. Financial data should be organized and reported according to relevant accounting periods.

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