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BY MD. ALI HOSSAIN Managing Director Poschimanchal Gas Company Ltd.

(A company of Petrobangla)

GAAP stands for Generally Accepted Accounting Principles. Despite its funny name, it is a very important idea for investors and companies alike. Basically, GAAP is a set of principles, standards, and procedures that companies agree upon in order to report their financial data. Some standards must be adhered to, such as those set by certain boards, and others are just commonly used standards that have become commonplace in these statements.

GAAP includes hundreds of different components, but here are a few of the most important:
Inventory costs Debt Stockholders' equity Short-term investments Long-term investments

Revenues and Sales


Taxation Profits Goodwill and other intangibles

Companies that use GAAP when making their reports will have mostly consistent ways of displaying the data. As a result, it is easier to find what you need, and more difficult for the company to trick you or misrepresent their figures. GAAP covers many different aspects of the financial reports, giving the companies a template and making your effort to read them easier.

Financial reporting should provide information that is: Useful to present to potential investors and creditors and other users in making rational investment, credit, and other financial decisions. Helpful to present to potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts. About economic resources, the claims to those resources, and the changes in them. Helpful for making financial decisions Helpful in making long-term decisions Helpful in improving the performance of the business Hseful in maintaining records

To achieve basic objectives and implement fundamental qualities GAAP has:


1. four basic assumptions,
2. four basic principles, and 3. four basic constraints

Accounting Entity: assumes that the business is separate from its owners or other businesses. Revenue and expense should be kept separate from personal expenses. Going Concern: assumes that the business will be in operation indefinitely. This validates the methods of asset capitalization, depreciation, and amortization. Only when liquidation is certain this assumption is not applicable. The business will continue to exist in the unforeseeable future. Monetary Unit principle: assumes a stable currency is going to be the unit of record. The FASB accepts the nominal value of the US Dollar as the monetary unit of record unadjusted for inflation. The Time-period principle: implies that the economic activities of an enterprise can be divided into artificial time periods.

Historical cost: principle requires companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities. This principle provides information that is reliable (removing opportunity to provide subjective and potentially biased market values), but not very relevant. Thus there is a trend to use fair values. Most debts and securities are now reported at market values. Revenue recognition :
principle requires companies to record when revenue is realized or realizable and earned, not when cash is received. This way of accounting is called accrual basis accounting.

Matching principle: Expenses have to be matched with revenues as long as it is reasonable to do so. Expenses are recognized not when the work is performed, or when a product is produced, but when the work or the product actually makes its contribution to revenue. Only if no connection with revenue can be established, cost may be charged as expenses to the current period (e.g. office salaries and other administrative expenses). This principle allows greater evaluation of actual profitability and performance (shows how much was spent to earn revenue). Depreciation and Cost of Goods Sold are good examples of application of this principle. Full Disclosure principle: Amount and kinds of information disclosed should be decided based on trade-off analysis as a larger amount of information costs more to prepare and use. Information disclosed should be enough to make a judgment while keeping costs reasonable. Information is presented in the main body of financial statements, in the notes or as supplementary information

Objectivity principle:

The company financial statements provided by the accountants should be based on objective evidence.
Materiality principle: The significance of an item should be considered when it is

reported. An item is considered significant when it would affect the decision of a reasonable individual.
Consistency principle:

It means that the company uses the same accounting principles and methods from year to year.
Conservatism principle:

When choosing between two solutions, the one that will be least likely to overstate assets and income should be picked

If a company does not use GAAP to report their financial data, be cautious! There is a better than average chance that they are trying to hide something from investors and the public. Also, realize that GAAP is only a set of standards. The same set of data can be displayed multiple ways to convey different things. It is still possible for companies to be tricky and misrepresent themselves even while adhering to GAAP principles. As a result, do not automatically believe a company's financials just because they are using GAAP.