Compliance with GAAP is mandatory by every business operating in the USA. Corporations that are public companies are closely monitored by the Securities and Exchange Commission (SEC) to ensure their compliance to GAAP.
The recognition principle states that a company records revenues in its accounts only when it has earned and realized the revenue (Horngren et al, 2008 p.703). Revenues therefore cannot be recognized if it has not been earned. A second important convention is the matching principle which states that revenues must be linked to the expenses associated with them. Accountants apply the matching principle by identifying the revenue recognized during a period and by linking the expenses to the recognized revenue directly ( Horngren, 2008 p.703).
This GAAP accounting principle states that the recording of cost must be at their fair market price. Fair market price is determined by the amount reflected on documents accompanying the goods and/or services to ensure objectivity and accuracy of accounting when purchases are made.
The effect of this costing principle on assets is that its value will not change until the market value of the asset changes. To effect this change in the books according to GAAP principle, a new require a new transaction as an evidence to effect the change of the value of the asset. In cases where objective evidence is not available to ascertain cost, the transaction can instead be recorded at its fair market value as determined by a third party appraiser (McKeown, 1973).
The recognition principle states that a company records revenues in its accounts only when it has earned and realized the revenue (Horngren, 2008 p.703). Revenue cannot be recognized if it has not been earned. This principle states that revenue must only be completed and recorded into a company’s books when the transaction is already completed. This means that revenue will only be