What Is the Main Goal of GAAP?

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 purpose of GAAP is to ensure that financial reporting is transparent, consistent, and comparable 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 GAAP purpose is to enforce clear and consistent 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 guidelines 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 report.

Identify what’s most important to investors in the financial statement. It also provides context for the information in the financial report.

Offer guidance on what’s within financial statements, including assets, expenses, liabilities, and revenues.

The Importance of GAAP

There are four beneficial things to know about GAAP:

GAAP Provides Transparency – Not only for public companies but also for business entities. Business entities can use GAAP guidelines to compare their financial standing with other businesses.

GAAP Improves Finances – 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.

GAAP Determines 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.

GAAP Helps Stakeholders – 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 in.

What Is The Purpose Of GAAP?

GAAP has goals accountants follow to ensure that all financial statements meet certain accounting rules. The main goal of GAAP is to make sure information within financial statements is:

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

Profits

Revenue 

Taxes 

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 

Materiality 

Revenue recognition

What Are The 10 Principles Of GAAP?

There are ten Generally Accepted Accounting Principles containing additional information about its goals and mission. The ten principles of GAAP are:

1. Regularity: The accountant has adhered to GAAP rules and regulations as a standard. 
2. 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 of the financial documents.
3. Sincerity: The accountant strives to provide an accurate and impartial depiction of a company’s financial situation.
4. Permanence of Methods: The procedures used in financial reporting should be consistent, allowing a comparison of the company’s financial information.
5. Non-Compensation: Both negatives and positives should be reported with full transparency and without the expectation of debt compensation.
6. Prudence: This accounting principle refers to emphasizing fact-based financial data representation that isn’t clouded by speculation.
7. Continuity: While valuing assets, it should be assumed the business will continue to operate.
8. Periodicity: Entries should be distributed across the appropriate periods of time. 
9. Materiality: Accountants must strive to fully disclose all financial data and accounting records in financial reports.
10. Utmost Good Faith: The accountant must remain honest in all transactions.

Compliance With GAAP

Compliance with GAAP isn't just an abstract notion; it's a crucial requirement for businesses and organizations aiming to establish credibility, attract investors, and build trust.

For public companies, GAAP compliance is not an option; it's an obligation. The Securities and Exchange Commission (SEC) mandates that these companies adhere to GAAP guidelines when preparing their financial statements. Failure to comply can lead to severe legal repercussions, loss of investor confidence, and damaged reputations.

GAAP compliance is not limited to public companies alone. Even private entities and non-profit organizations can benefit from implementing GAAP. Compliance demonstrates a commitment to financial transparency, facilitating accurate decision-making, securing loans, and attracting potential investors.

GAAP vs. IFRS

While both GAAP and IFRS strive to achieve the same goal of reliable financial reporting, they have distinct approaches and perspectives. GAAP focuses on accounting rules, providing detailed guidance for specific situations. On the other hand, IFRS takes a principles-based approach, allowing more room for interpretation and judgment.

Another key difference lies in their adoption. GAAP is primarily used in the United States, with the Financial Accounting Standards Board (FASB) overseeing its development. In contrast, IFRS has gained widespread acceptance in over 120 countries, facilitated by the International Accounting Standards Board (IASB).

These differences can impact financial reporting, making it essential for multinational companies to navigate the complexities and bridge any gaps when preparing their statements.

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 a small business tax accountant who can uphold the financial standards that are important to your business.