Generally Accepted Accounting Principles represent the rules that serve as a guide for measuring, recording and reporting a company's financial information. Accounting is not an exact science, but rather it is based on generally accepted accounting principles that are not experimentally verifiable.
In Canada, the Canadian Institute of Chartered Accountants (CICA) provides generally accepted accounting principles. The CICA publishes and updates the CICA Handbook which is organized according to International Financial Reporting Standards (IFRS) and accounting standards for closed enterprises.
Generally accepted conventions:
- company personality;
- the permanence of the company
- accounting for currency transactions;
- periodicity.
The personality of the company represents the separation between the activities of the company and that of its owner. It does not necessarily cover the legal form of the company.
The permanence of the company represents the continuation of the activities of the company for the foreseeable future.
Accounting for currency transactions is based on money to measure all economic activities and serves as a measure for accounting. In addition, financial information must be presented in the same currency.
Periodicity assumes that the economic activity of the company can be divided into equal and arbitrary periods. The most common periods are month, quarter and year.
Generally Accepted Accounting Principles
- the cost principle;
- the principle of objectivity;
- the income realization principle;
- the principle of reconciliation;
- the fair and complete presentation of the financial statements;
- the importance of items and amounts;
- the principle of continuity;
- the attitude of caution.
The cost principle states that transactions should be accounted for at acquisition cost and that financial statements should also be prepared at cost. The acquisition cost is an objective and verifiable measure.
The principle of objectivity established impartially by eliminating as much as possible perception and personal bias. Transactions must be based on facts.
The revenue realization principle represents when revenue should be recorded. Revenue is generally recognized upon completion of work or reasonably certain collection of consideration.
The matching principle is used to describe the recognition of expenses in the same period as the operating income to which they relate. The recognition of an expense is therefore linked to the recognition of income.
The principle of fair and complete presentation represents the representation of the operations and facts of the company are consistent with the actual operations and facts.
The principle of materiality of items and amounts represents the consequences of omission or misstatement for decision makers using financial information. The importance must take into account the order of magnitude and the quality of the information.
The principle of continuity means that the company will continue its activities for the foreseeable future and that it will be able to realize its assets and its debts in the course of its activities.
The principle of prudence means to choose the solution which is less likely to overstate the profit or the net assets.