ABSTRACT
Generally accepted accounting principles: A widely accepted set of rules, conventions, standards, and procedures for reporting financial information, as established by the Financial Accounting Standards Board. Most companies in the United States adhere to Generally accepted accounting principles to maintain consistency and comparability in the reporting of financial information. If Generally accepted accounting principles did not exist, there would be little to no assurance to investors, creditors, and stakeholders of a company that financial statements are a fair, accurate, and consistent representation of operations. Therefore, under Generally accepted accounting principles, the expenses associated with creating a product that is unsold cannot be recorded until the sale occurs; that is, the expenses must be matched to the sale. Generally accepted accounting principles requires absorption costing because both variable and fixed costs are required to produce goods, and both types of costs should be reflected in inventory, regardless of their differences in behavior patterns.
