Generally accepted accounting principles which are commonly referred to as GAAP are the accounting rules or regulations if you will, that are used to prepare financial statements for publicly traded companies as well as many private companies in the United States. Generally accepted accounting principles for local and state governments operates under a different set of assumptions, principles, and constraints, as determined by the Governmental Accounting Standards Board (GASB). (http://www.gasb.org/facts/index.html) The reason for calling them rules and not laws quite simply is because they are not written into law. The United States government as well as any other country whose government is based on English common law believes whole heartedly that the the public sector does not possess the proper resources nor the depth of knowledge to set accounting standards. They feel that the private sector is better equipped to monitor and regulate accounting practices. The fact that GAAP is extremely important to the preparation of financial statements is a given.
Portrait of Henry Ford (ca. 1919)
English: Ford Motor Company Headquarters, Dearborn...
1961 Ford H-Series trucksIt is the only guidance given and is the key to standardization. The following terms mentioned are all and important part of GAAP and the preparation of financial statements.
Though financial statements afford many people the opportunity to gauge the posture of a company, they are not always an accurate reflection due to the fact that they are prepared by human beings. There is always an opportunity to include subjective and or biased market values. The next term, historical cost principle provides reliable information thus removing the ability to skew important data. The historical cost principle requires companies to report based on acquisition costs rather than fair market value for the majority of their assets and liabilities. "Fair Market Value is a term in both law and accounting to describe an appraisal based on an estimate of what a...