Accounting and Finance Foundations

Unit 5

Accounting and Finance Foundations Unit 5: Accounting Terminology 313

Accounting Terminology

Chapter 12

Lesson 12.5 Accounting and US GAAP

Accounting is the language of business used to communicate financial information. The presentation and

calculation of financial information must be standardized; therefore, accounting is based on several general

statements that serve as guidelines for record keeping and preparing financial statements. These general

statements are officially referred to as the United States Generally Accepted Accounting Principles (US

GAAP)—accounting principles that are used to prepare, present, and report financial statements. By using

these principles as the foundation, readers of financial statements and other accounting information do not

need to make assumptions about what the numbers mean.

For instance, the difference between reading that a truck has a value of $9,000 on the balance sheet and

understanding what that $9,000 represents is significant. Can you sell the truck for $9,000? If you had

to buy the truck today, would you pay $9,000? Or, perhaps the original purchase price of the truck was

$9,000.

Although US GAAP is not an official law, the U.S. Securities and Exchange Commission (SEC) requires that

public companies follow US GAAP in their financial reporting. US GAAP ensures that company financial

statements are reliable and based on accepted standardized principles. US GAAP is typically divided into

three parts:

Basic Assumptions for US GAAP:

1. Entity Assumptions


2. Going Concern Assumptions


3. Monetary Unit Assumptions


4. Time Period Assumptions

Principles for US GAAP:

1. Cost Principle


2. Matching Principle


3. Revenue Recognition Principle


4. Disclosure Principle

Constraints of US GAAP:

1. Materiality


2. Cost-Benefit Relationship


3. Consistency Principle


4. Conservatism Principle

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