That length of foreseeable future is at least one year.Ī third key assumption is that amounts listed in the organization’s financial statements are stated in terms of a stable currency. The second key assumption is that the business is a going concern, and will be for the foreseeable future.
This means that all of the figures shown in the organization’s financial reports are specific only to that organization, that no other separate business entity is obligated to contribute to the organization or can lay claim to the business’ bottom line revenues. The first key assumption comprising GAAP is that the business entity is separate and distinct from all others. Reporting according to GAAP provides a measure of uniformity so that those examining financial statements have a foundation from which to compare performance to another period or another company, or develop financial ratios that use specific GAAP-defined quantities.Įven though there is no overseeing authority, GAAP depends on a rule of four in terms of key assumptions, basic principles and basic constraints. Rather, GAAP represents a collection of broad concepts and detailed practices that represent best accounting practices as it is accepted at a given time, and often within a specific industry. GAAP is not necessarily a collection of rules and guidelines, though GAAP uses those.
GAAP is the abbreviation of Generally Accepted Accounting Principles.
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