0GAAP is the common set of accounting principles, standards and procedures that organizations use to make accounting transactions and compile their financial statements. GAAP is a combination of:
Commonly accepted ways of recording and reporting accounting information; and
Authoritative standards (set by policy boards – see section 2.2 International Public Sector Accounting Standards, for further description of the standards setting process for the public sector)
GAAP is an essential guide for financial and accounting managers to help make judgments on how to record transactions. GAAP is a set of guidelines or, more precisely, a group of objectives and conventions that have evolved over time to govern how financial statements are prepared and presented.
GAAP covers revenue and expenditure recognition as well as balance sheet item classification. Organizations are expected to follow GAAP rules when reporting their financial data via financial statements.
Since GAAP is founded on the basic accounting principles and guidelines, we can better understand GAAP if we understand those accounting principles. The table below lists the ten main accounting principles and guidelines together with a highly condensed explanation of each.
There are two alternative basis of accounting - accrual and cash. GAAP has been developed to meet the requirements of the accrual basis of accounting and therefore in many instances the Cash basis of accounting does not follow GAAP. The primary difference is with respect to revenues and expenses which, in the cash basis, are recognized only when received or paid. This ignores the concept of revenues earned but not received, and, expenses incurred but not paid. Another key difference is the treatment of capital assets. Accrual based accounting depreciates capital assets over their useful life, whereas cash based accounting expenses the entire amount of the capital purchase when it is made. It should be noted that the Government of Libya generally uses the cash basis of accounting, except for some types of . Since most of the private sector incorporates the accrual basis of accounting, and many governments already use or are moving to this method of accounting, it is important that it be included to some degree in this manual.
