GAAP have evolved over time through the development of accounting practices and standards. They come from three resources: assumptions, concepts & principles; the Conceptual Framework; and Accounting Standards.
Assumptions, Concepts & Principles
Guide the preparation of financial statements. Accounting principles are the basic rules of accounting, which have become accepted procedures over time. An entity must follow them when reporting financial data, so that financial statements are consistent, reliable and comparable.
Key principles
- Monetary principle: Only transactions that can be expressed in terms of money are recorded.
- Accounting entity concept: An entity’s financial activities must be kept separate from the personal or private activities of its owner(s).
- Accounting period concept: The entity’s life is divided into equal periods of time called reporting periods (a month, a half-year or a full financial year).
- Going concern assumption: Assumes the entity will continue to operate into the future.
- Accrual basis assumption: Income is recognised when it is earned, and expenses are recognised when they are incurred.
- Historical cost principle: Transactions are initially recorded at their original cost price.
Conceptual Framework
Outlines the general principles of financial reporting.
Chapters
- The Objective of General Purpose Financial Reporting (GPFR)
- Qualitative Characteristics
- Reporting entity
- Elements
- Recognition
- Measurement
- Presentation & disclosure
- Capital maintenance
Accounting Standards
Mandatory for the preparation of financial reports: these are the specific rules, issued by the AASB.
Examples
- AASB 15 Revenue from Contracts with Customers
- AASB 102 Inventories
- AASB 116 Property, Plant & Equipment
- AASB 136 Impairment of Assets
- AASB 137 Provisions, Contingent Liabilities & Contingent Assets