Generally Accepted Accounting Principles (GAAP) measure the financial health of public companies. There are standards within GAAP that provide other accountants with information. The main goal of GAAP is to ensure that financial reporting is transparent and consistent across organizations.
What Is GAAP?
GAAP refers to a set of accounting principles, procedures, and standards that the Financial Accounting Standards Board (FASB) issues.
The main goal of GAAP is to enforce transparent and standardized financial reporting for companies. Public companies have a requirement to use GAAP when their companies’ accountants create their financial statements.
Companies that follow and implement GAAP in their financial reporting will:
- Detail which line items, subtotals, and totals you should aggregate and which should appear within financial statements.
- Follow accounting standards, outlining each component’s amount within the financial statement.
- Identify what’s most important to investors in the financial statement. It also provides context for the information in the financial statement.
- Offer guidance on what’s within financial statements, including assets, expenses, liabilities, and revenues.
4 Important Things to Know About GAAP
There are four other things to know about GAAP. One, although public companies must use GAAP for their financial statements, not every company has a similar requirement. Nonprofits and private companies may choose to use GAAP standards or use a different accounting standard.
GAAP provides transparency not only for public companies but also within business entities. Business entities can use GAAP to compare their financial standing with other businesses.
Second, public companies can also benefit from using GAAP. Internally, public companies can use GAAP to determine where to improve their finances by reviewing their financial statements. This can be useful for public companies and small businesses to see trend data over a duration of time. Management within these companies can also use GAAP to review their company’s financial health. By using GAAP, management within businesses can review several indicators of their company’s overall health, such as their company’s:
Third, GAAP can help during times of potential investment opportunities. There are ways to implement GAAP to ensure current viability and future potential investments. Investors rely on the information within financial statements to decide whether a company’s viable enough for investments.
Investors can review financial statements to understand a company’s expenses, operations, and revenues. They can also know that the information on financial statements using GAAP is accurate.
The fourth way GAAP can help small business owners is also with investments, but for a different opportunity. Stakeholders are another group of people who can use GAAP to review the health of a public company. They can compare the financial statements of your public company to a competitor to determine if your small business is worth investing into.
What Is The Main Goal Of GAAP?
GAAP has goals accountants follow to ensure that all financial statements meet certain conditions. The main goal of GAAP is to make sure information within financial statements are:
- Auditable and verifiable by a third party
- Comparable to other organizations’ financial statements
- Comprehensible to users of information
- Reflective, relevant, and representative of the company’s financial state
The main goal of GAAP also works in a way where all public companies provide the same information in their financial statements. Public companies must issue reports containing information about their:
- One-time expenditures
GAAP also touches on other topics to ensure uniformity among financial statements for public companies. There are three topics that GAAP covers to further establish standards applicable to public companies. These standards include:
- Balance sheet classification
- Revenue recognition
What Are The 10 Principles Of GAAP?
There are ten principles of GAAP containing additional information about its goals and mission. The ten principles of GAAP are:
- Regularity: The accountant has adhered to GAAP rules and regulations as a standard.
- Consistency: Accountants commit to applying the same standards throughout the reporting process, from one period to the next, ensuring financial compatibility between periods. Accountants are also expected to disclose and explain the reasons behind any changed or updated standards in the footnotes to the financial statements.
- Sincerity: The accountant strives to provide an accurate and impartial depiction of a company’s financial situation.
- Permanence of Methods: The procedures used in financial reporting should be consistent, allowing a comparison of the company’s financial information.
- Non-Compensation: Both negatives and positives should be reported with full transparency and without the expectation of debt compensation.
- Prudence: This principle refers to emphasizing fact-based financial data representation that isn’t clouded by speculation.
- Continuity: While valuing assets, it should be assumed the business will continue to operate.
- Periodicity: Entries should be distributed across the appropriate periods of time.
- Materiality: Accountants must strive to fully disclose all financial data and accounting information in financial reports.
- Utmost Good Faith: The accountant must remain honest in all transactions.
Work with the Professionals to Handle Your Accounting
Whether your small business chooses to follow GAAP or other financial standards, it’s vital that your business follows some sort of accepted standard that governs your finances. Work with an accountant who can uphold the financial standards that are important to your business. Work with accountants at 1-800Accountant for your small business’s financial needs.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.