Over seventy-five years ago, is when all the accounting and financial terms came about. The first market crash is what caused the improvement purpose of needing a set of guidelines and rules. Which will later be introduction to the world as the Generally Accepted Accounting Principles.
Generally Accepted Accounting Principles as known as GAAP is a set guidelines, rules, and detailed procedures. (Karimi, 2013) In USA this set of rules has been established by the Financial Accounting Standards Board or FASB. These statements are used by investors, banks and creditors to determine the financial health of the company and its suitability for investment of extension of credit. Although there is no comprehensive list of GAAP, the structure is based upon four key assumptions: going concern, business entity, monetary unit and time period principle, four basic principles: cost, revenue, matching and disclosure and four basic constraints. (Francois, 2013) The business entity assumption is the idea that the business functions as a legal and financial entity separate from its owners or any other business, which means that all the amounts shown as revenue or expense in the financial statements are for the business alone and do not include any personal expenses. Going concern is the assumption that the business will operate for the foreseeable future. This is important when calculating the values for assets, depreciation and amortization. Monetary unit assumption is all the amounts listed use one stable currency, and that any amounts in another currency are clearly listed. Time period assumes that all the transactions reported did in fact occur within the time period as listed. The cost principle refers to the notion that all values listed and reported are the costs to obtain or acquire the asset, and not the fair market value. The revenue principle states that all revenue must be reported when are it realized and earned, not necessarily when the actual cash is received. The matching principle holds that the expenses in the financial statement must be matched with the revenue. Finally, the disclosure principle holds that information pertinent to make a reasonable judgment on the company's finances must be included, so long as the costs to obtain that information are reasonable. (Francois, 2013)
To ensure compliance across all regulated companies, GAAP provides a set of accounting practices. So that investors have a minimum level of consistency in the financial statements they use when analyzing companies for investment purposes. (Investopedia, 2013) GAAP also ensures that all companies have the same method for reporting financial information. For example, without a way to measure the cost of a machine, one company might report the entire cost in one year making its earnings much smaller. While another company, who bought the same exact machine, might spread the cost over 10 years giving