A. Generally Accepted Accounting Principles.
GAAP is not a fixed set of rules. It is a guideline or more precisely a group of objectives and concepts that have evolved over 500 years from the basic concepts of Luca Pacioli set forth in the 1400s. It governs how financial statements are prepared and presented in the United States. The Financial Accounting Standards Boards (FASB), the American Institute of Certified Public Accountants and the Securities and Exchange Commission (SEC) provide guidance about acceptable accounting practices. Some of the reasons we use GAAP are that any business that expects anyone from outside their company to look at their financial data needs to use GAAP. Compliance with GAAP helps maintain creditability with creditors and stockholders because it reassures outsiders that a company's financial reports accurately portray their financial position. Additionally anyone who reads your financial statements will automatically assume they are prepared and comply with GAAP. Another reason to use GAAP is that banks and finance companies often require their clients to use GAAP or have audited financial statements. It would be cheaper in the long run to prepare statements using GAAP than pay someone to audit them all the time. Additionally investors who are accustomed to using financial information prepared according to GAAP might balk if your statements don't meet their expectations, which could lead to unhappy investors ultimately leading to a loss of profits. Finally the SEC requires companies to comply with GAAP.
The basic point of the Generally Accepted Accounting Principles is to put everything in one format so that every business is not doing things there own way and it makes it easier for the investment community to read the business's financial statements. B. Historical Cost.
Historical cost is the actual purchase price plus incidental costs incurred in getting the fixed asset in a condition and position...