What is GAAP, or accounting principles?

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Camil Asadov – editor / teacher at Zardab Vocational Lyceum

On the concept of “accounting principles”

Accounting legislation in Azerbaijan does not provide a formal definition of the concept of “accounting principles.” However, without accounting principles, it would be impossible for accounting to form and develop as a science. This is exactly what makes the identification of accounting principles necessary.

The explanatory dictionary defines the word “principle” (from the Latin “principium” meaning beginning) as the fundamental basis or starting point of a theory. This means that accounting principles are the foundation and starting point of accounting as a science.

R. Anthony and J. Rees noted that “the rules and agreed concepts of accounting are usually called principles. The word ‘principle’ is used in the sense of a general law or rule that is accepted or declared as a guide for action, or as the basis of an agreed position, behavior, or practice.”

Accounting principles are based on several key concepts. They are developed by people and, unlike the laws of physics, chemistry, and other natural sciences, they are not “eternal truths.”

Sources of accounting principles

Accounting is shaped by the environment in which it operates. Each country has its own history, values, and political system. These differences are reflected both in the variety of existing forms of economic organization and in the influence of external factors such as political, economic, social, and geographical conditions on accounting practice. For example, accounting principles in the United States differ significantly from those applied in many other countries.

At the same time, accounting does not recognize national borders. Accounting technologies are exported and imported, which leads to similarities between accounting systems used in different countries. As a result, accounting principles in various countries tend to become closer to each other.

The foundation of accounting is formed by a set of rules known as generally accepted accounting principles. The sources and methodological basis of these principles are developed by a number of organizations that establish international and national accounting standards. Let us briefly look at some of them.

The Financial Accounting Standards Board (FASB) was established in 1973 and is based in the United States. The Board consists of permanent members who are leading accountants responsible for developing new principles or updating existing ones. The Financial Accounting Standards Board is a non-governmental organization and is funded through contributions from business entities. FASB standards are recognized by the U.S. Securities and Exchange Commission (SEC) as the required standards for public companies.

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The SEC states its mission on its official website as follows:

  • to protect investors;
  • to maintain fair, orderly, and efficient markets;
  • to facilitate capital formation.

At the initial stage, the SEC was responsible for promoting generally accepted accounting principles. Over time, however, the task of setting standards was delegated to the FASB and its predecessor organizations.

In other countries, accounting principles may differ from those adopted in the United States, but their core ideas are largely the same. For this reason, starting in 1973, the International Accounting Standards Committee (IASC) published a series of bulletins that summarized accounting principles for use across countries. As of July 1, 2000, a new Constitution came into force. Under this Constitution, the standard-setting body was renamed the International Accounting Standards Board (IASB).

Today, the IASB and the International Sustainability Standards Board (ISSB), operating under the IFRS Foundation, set international accounting standards. These standards are developed by taking into account various concepts and principles.

What is GAAP?

Today, Azerbaijan is part of the global community and actively participates in the international economy. For this reason, it is necessary to reform accounting and financial reporting rules in the country and bring them as close as possible to internationally accepted accounting standards.

Generally Accepted Accounting Principles, or GAAP, are a set of norms, rules, and procedures that govern the application of accounting within a certain period in accordance with a country’s national accounting legislation. At present, there are two internationally recognized sets of standards that regulate the preparation of financial statements.

  • Generally accepted accounting principles in the United States, known as US GAAP;
  • International Financial Reporting Standards, known as IFRS or International GAAP.

Although the term “generally accepted” is used in US GAAP, these principles may differ from country to country, but they share many common features.

The purpose of accounting principles is to create a common accounting language between companies and business entities. This helps to:

  • improve the readability of accounting reports;
  • enhance the quality of financial statements;
  • help investors compare companies.

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