US GAAP What Are The 10 Key Principles
Financial transparency and the standardization of accounting practices are of utmost importance to most businesses nowadays. They enable companies to navigate legal and regulatory requirements efficiently and ensure maximum compliance with the law.
The US Generally Accepted Accounting Principles (GAAP) represent one such widely accepted set of principles that various types of businesses and professional accounting firms utilize globally, including accounting services in Malaysia.
These principles play a crucial role in bringing uniformity to complex accounting procedures.
What is US GAAP?
The Financial Accounting Standards Board (FASB) has issued US GAAP to standardize accounting rules, procedures, and functions.
In the USA, public companies are legally required to adhere to US GAAP when preparing financial statements and reports. However, US GAAP is no longer confined to the USA alone.
Currently, many different firms and accounting services in Malaysia, as well as worldwide, utilize US GAAP to ensure the implementation of the best accounting practices and maintain financial transparency throughout their organizations.
It has become a widely adopted framework to promote consistency and accuracy in financial reporting globally.
10 Principles of GAAP
It becomes much easier to understand the workings of US GAAP by learning its ten different principles:
1. Principle of Regularity
The principle of regularity refers to the accounting practice that accountants should adhere to a standard set of rules and practices. These guidelines aim to assist them in producing consistent and accurate results when generating financial reports and statements.
2. Principle of Consistency
It is similar to the principle of consistency, but it requires accountants to ensure the consistent use of accounting standards throughout a reporting period.
If any changes are made to the accounting principles or standards, they must disclose them along with an explanation in their reports.
Maintaining uniformity in accounting practices across different accounting periods also facilitates easier comparisons for accountants and stakeholders.
3. Principle of Sincerity
It is the duty of accountants or professional accounting service providers in Malaysia, following GAAP (Generally Accepted Accounting Principles), to disclose a complete and accurate picture of a company’s financial health.
Even if a company has in-house accountants, they must avoid being partial towards the company and, instead, maintain an independent and fair view to produce accurate accounting reports.
4. Principle of Permanence of Methods
It is crucial to maintain consistency in financial reporting to ensure ease of comparison between a company’s financial information and promote transparency throughout the process.
However, it is important to note that certain GAAP standards and accounting rules may vary from one industry to another. As a result, professional accountants must implement industry-specific accounting rules and practices.
5. Principle of Non-Compensation
Accountants have the responsibility to present both the positive and negative aspects of an organization in their financial records. This approach provides stakeholders with a clear and comprehensive picture of the company, without attempting to hide vital details or sugarcoat information.
6. Principle of Prudence
Accounting records should be based on concrete facts and figures rather than assumptions, especially when such assumptions are not stated in the reports. Accountants commonly utilize various GAAP methods to ensure reliability and accuracy.
7. Principle of Continuity
Under the principle of continuity, accountants must value assets assuming that the business will continue to operate in the foreseeable future. This often leads to valuing a company’s assets at their original price rather than their disposable value.
8. Principle of Periodicity
Accounting periods are a fundamental concept in accounting. Professional accounting services in Malaysia, as well as worldwide, must prepare financial and accounting reports based on relevant accounting periods while utilizing appropriate accounting methods for accuracy.
9. Principle of Materiality/Good Faith
Accountants are required to disclose all financial information and details about the accounting data in their reports. However, this principle also allows accountants to disregard certain GAAP accounting rules when the amounts in question are insignificant in the overall accounting data.
10. Principle of Utmost Good Faith
The tenth and final principle of US GAAP outlines the ideal scenario for business operations, encouraging all parties involved in a transaction to remain honest and transparent in all their financial dealings.
Overall, the ten principles of US GAAP constitute a comprehensive accounting framework that every company should adhere to for maximum efficiency, productivity, and accounting transparency.
Professional services in Malaysia can assist organizations in following these principles and adopting the best accounting industry standards, enabling even small companies to compete with leading enterprises.