Accounting terms

What does GAAP stand for, and why is it important?

Generally Accepted Accounting Principles. It ensures financial statements are consistent, comparable, and reliable.

What is the Business Entity Concept?

The business is treated as separate from the owner; personal and business finances must be kept separate.

What does the Cost Principle state?

Assets must be recorded at their original purchase price, not current market value.

What is the Objectivity Principle?

All recorded data must be backed by objective, verifiable evidence like receipts or documents.

What does the Matching Principle require?

Expenses must be recorded in the same period as the revenues they helped generate.

What is the Time Period Principle?

Financial statements must cover specific, consistent time periods (e.g., month, quarter, year).

What does the Revenue Recognition Principle say?

Revenue is recorded when it is earned, not when cash is received.

What is the Materiality Principle?

Minor items can be simplified; only significant data needs detailed accounting.

What is the Consistency Principle?

Accounting methods must remain consistent across periods unless a change is justified and disclosed.

What does the Disclosure Principle state?

All relevant information must be clearly reported in financial statements or notes.

What is the Principle of Conservatism?

When in doubt, choose the option that understates rather than overstates assets or income.