GAAP: Generally Accepted Accounting Principles PDF

GAAP (Generally Accepted Accounting Principles) GAAP​ (generally accepted accounting principles) is a collection of commonly-followed accounting rules and standards for financial reporting. GAAP​ specifications include definitions of concepts and principles, as well as industry-specific rules. The...

GAAP (Generally Accepted Accounting Principles) GAAP​ (generally accepted accounting principles) is a collection of commonly-followed accounting rules and standards for financial reporting. GAAP​ specifications include definitions of concepts and principles, as well as industry-specific rules. The purpose of ​GAAP​ is to ensure that financial reporting is transparent and consistent from one organization to another. There is no universal ​GAAP​ standard and the specifics vary from one geographic location or industry to another. In the United States, the ​Securities and Exchange Commission (SEC) mandates that financial reports adhere to ​GAAP​ requirements. The ​Financial Accounting Standards Board (FASB)​ stipulates ​GAAP ​overall and the ​Governmental Accounting Standards Board (GASB) ​stipulates G ​ AAP​ for state and local government. Publicly traded companies must comply with both SEC and ​GAAP​ requirements. Basic Accounting Principles and Guidelines of GAPP Since ​GAAP​ is founded on the basic accounting principles and guidelines, we can better understand ​GAAP​ if we understand those accounting principles. The following is a list of the ten main accounting principles and guidelines together with a highly condensed explanation of each. 1. Economic Entity Assumption The accountant keeps all of the business transactions of a sole proprietorship separate from the business owner's personal transactions. For legal purposes, a sole proprietorship and its owner are considered to be one entity, but for accounting purposes they are considered to be two separate entities. 2. Monetary Unit Assumption Economic activity is measured in U.S. dollars, and only transactions that can be expressed in U.S. dollars are recorded. 3. Time Period Assumption This accounting principle assumes that it is possible to report the complex and ongoing activities of a business in relatively short, distinct time intervals such as the five months ended May 31, 2018, or 5 weeks ended May 1, 2018. 4. Cost Principle From an accountant's point of view, the term "cost" refers to the amount spent (cash or the cash equivalent) when an item was originally obtained, whether that purchase happened last year or thirty years ago. For this reason, the amounts shown on financial statements are referred to as historical cost amounts. 5. Full Disclosure Principle If certain information is important to an investor or lender using the financial statements, that information should be disclosed within the statement or in the notes to the statement. It is because of this basic accounting principle that numerous pages of "footnotes" are often attached to financial statements. 6. Going Concern Principle This accounting principle assumes that a company will continue to exist long enough to carry out its objectives and commitments and will not liquidate in the foreseeable future. 7. Matching Principle This accounting principle requires companies to use the accrual basis of accounting. The matching principle requires that expenses be matched with revenues. 8. Revenue Recognition Principle Under the accrual basis of accounting (as opposed to the cash basis of accounting), revenues are recognized as soon as a product has been sold or a service has been performed, regardless of when the money is actually received. Under this basic accounting principle, a company could earn and report $20,000 of revenue in its first month of operation but receive $0 in actual cash in that month. 9. Materiality Because of this basic accounting principle or guideline, an accountant might be allowed to violate another accounting principle if an amount is insignificant. Professional judgement is needed to decide whether an amount is insignificant or immaterial. 10. Conservatism If a situation arises where there are two acceptable alternatives for reporting an item, conservatism directs the accountant to choose the alternative that will result in less net income and/or less asset amount. Conservatism helps the accountant to "break a tie." It does not direct accountants to be conservative. Accountants are expected to be unbiased and objective. GAAP compliance Being ​GAAP​ compliant essentially means that you have maintained financial records in a way that allows investors, lending institutions, prospective buyers, etc. to make a sound decision regarding your company. For the average entrepreneur or small business owner with a terrific idea or great product, ​GAAP​ will not even be on the radar. As soon as you need some financing for expansion or are approached by a potential buyer, however, you will need to be compliant. Purpose of GAAP: The purpose of ​GAAP ​is to create a uniform standard for financial reporting. When financial information is made available to the public, it should serve the purpose of helping investors make informed decisions as to where to put their money. GAAP used: Managers and investors would struggle to interpret financial statements without U.S. Generally Accepted Accounting Principles. ​GAAP p ​ rovides a standardized methodology for recording transactions and events that impact the financial position of a company. GAAP necessary: Having accounting standards like US ​GAAP ​and IFRS enables you to compare the performance of companies within and across economic sectors, so the standards are necessarily generic in nature. ​GAAP n ​ umbers should be neutral, comparable and verifiable, and provide information that markets can trust. GAAP required for private companies? The AICPA framework is a reporting system that should be popular with both companies and their banks. There are more than twenty million SMEs in the United States that do not have to comply with ​GAAP ​because they are not public, although many private companies prefer to follow ​GAAP ​rules. Is GAAP required for private companies The AICPA framework is a reporting system that should be popular with both companies and their banks. There are more than twenty million SMEs in the United States that do not have to comply with ​GAAP ​because they are not public, although many private companies prefer to follow ​GAAP ​rules Do all US companies have to use GAAP? The use of ​GAAP ​is not mandatory for all businesses, but the U.S. Securities and Exchange Commission (SEC) requires publicly traded and regulated companies to follow ​GAAP ​for the purpose of financial reporting Is GAAP worldwide? International Financial Reporting Standards (IFRS) is the accounting method that's used in many countries across the world. It has some key differences from the​ Generally Accepted Accounting Principles (GAAP)​ implemented in the United States.