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:
The Importance of GAAP
There are four beneficial things to know about GAAP:
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:
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:
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:
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:
- 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 of the financial documents.
- 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 accounting 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 records in financial reports.
- 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.
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.