In the United States, as well as other countries practicing English common law system, the government does not set accounting standards, in the belief that the private sector has better knowledge and resources. The GAAP is not written in law, although the SEC requires that it be followed in financial reporting by publically traded companies.
GAAP has four basic principles. The historical cost principle requires companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities. The revenue recognition principle requires to record when revenue is realized or realizable and earned, not when cash is received. The way of accounting is called accrual basis accounting. The third principle is the matching principle. Expenses have to be matched with revenues as long as it is reasonable doing so. The last principle is called the full disclosure principle. Amount and kinds of information disclosed should be decided based on trade-off analysis as larger amount of information costs more to prepare and use it. Information disclosed should be enough to make judgement while keeping costs reasonable.
Those organizations influence developing GAAP in the United States.
Conceptual frame work
Setting GAAP
GAAP is composed of various documents. Accounting Principles Board (APB) dissolved in 1973 and the FASB took over the responsibility setting up the standards.
| House of GAAP | ||||
|---|---|---|---|---|
| Category (d) (Least authoritative) | AICPA Accounting Interpretations | FASB Implementation Guides (Q and A) | Widely recognized and prevalent industry practices | |
| Category (c) | FASB Emerging Issues Task Force | AICPA AcSEC Practice Bulletins | ||
| Category (b) | FASB Technical Bulletins | AICPA Industry Audit and Accounting Guides | AICPA Statements of Position | |
| Category (a) (Most authoritative) | FASB Standards and Interpretations | APB Opinions | AICPA Accounting Research Bulletins | |