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Sales and expenses are accounted for when the purchase or sale is made, regardless of when the actual payment is made or received. Principle of Utmost Good Faith Assumes that all businesses are being honest in their financial reporting, derived from the Latin phrase uberrimae fidei. The revenue recognition principle works the same way. An example would be: commissions are accounted for in the week that the sale was made, not the week the commission was paid. That is, expenses are matched to revenues as they occur. The matching principle requires that companies use the accrual basis for accounting. The going concern principle assumes a company “will continue to exist long enough to carry out its objectives and will not liquidate in the foreseeable future,” states Accounting Coach. The full disclosure principle requires accountants to disclose all pertinent information, often in pages of footnotes to the financial statement. For the purpose of gathering and disclosing accounting data, GAAP is made up of authoritative standards (issued by policy authorities) and widely accepted. The GAAP has gradually evolved, based on established concepts and standards, as well as on best practices that have come to be commonly accepted across different industries. The cost principle states that "cost" always refers to the amount initially paid for an item and accountants should not adjust upward for inflation. Generally Accepted Accounting Principles began to be established with legislation such as the Securities Act of 1933 and the Securities Exchange Act of 1934. GAAP lay out five main principles for accountants to follow.
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