Find Out What GAAP Is
Finance reporting is an essential aspect of any organization because it displays a company’s financial status and performance.
It keeps track of the company’s financial situation, sales, investments, and relevant reports and displays them. In this article, you can find out what GAAP is.
Public firms measure their financial health is using Generally Accepted Accounting Principles (GAAP). Within GAAP, some standards provide information to other accountants. When public corporations in the United States create their financial accounts, their accountants must adhere to GAAP.
A consistent, comparable accounting approach helps preserve stability month to month. GAAP comes into play here.
What Really Is GAAP?
The acronym GAAP stands for “Generally Accepted Accounting Principles,” and it is the set of rules that most financial analysts in the United States use to record and report a firm’s financial position.
The basic purpose of GAAP is to ensure that organizations’ financial reporting is transparent and standardized. The Securities and Exchange Commission (SEC) only demands GAAP compliance for publicly traded corporations and companies that are required to publicly report their financial statements. However, most finance professionals, such as accountants, CPAs, finance professionals, managers, and CFOs, continue to adhere to these rules. This is particularly true if a firm plans to go public or engage in a transaction such as a takeover, purchase, or capital raise in the future.
Companies that stick to GAAP in their financial reporting will:
- Follow accounting rules by detailing the quantity of each component in the financial report.
- Determine what information in the financial statement is most important to investors. It also gives context to the financial statement’s facts.
- Provide direction on the contents of financial statements, such as holdings, liabilities, debts, and earnings.
Main Goal of GAAP
GAAP establishes objectives for accountants to accomplish to make sure that all accounting information fulfills specified criteria.
The basic purpose of GAAP is to ensure that the following information is in financial statements:
- Third-party auditable and verifiable
- Financial statements that are comparable to those of other companies
- Users of information will be able to understand it.
- Reflective, relevant, and accurate of the financial situation of the organization
GAAP also covers a variety of other areas in order to ensure that balance sheets for public companies are consistent. GAAP addresses two themes to further develop standards that apply to public companies. These requirements include:
- Classification of the balance sheet
- Revenue Recognition’s Importance
What Are the 9 Principles Of GAAP?
GAAP has ten principles that provide further information about the organization’s vision and strategies.
The 10 GAAP principles are as follows:
- Regularity: As a rule, the accountant has to follow GAAP standards and regulations.
- Accountants pledge to use the same standards throughout the information disclosure, from one period to the next, to ensure financial consistency. In the footnotes to the financial statements, accountants must additionally report and explain the rationale for any revised or updated standards.
- Sincerity: An accountant seeks to present a fair and accurate picture of a company’s financial status.
- Methods Permanence: Financial reporting procedures should be regular, allowing for an evaluation of the company’s financial data.
- Non-compensation: Both faults and praises should be shown in total transparency and without the intention of receiving a debt repayment.
- Continuity: It is reasonable to presume that the business will continue to operate while valuing assets.
- Periodicity: Updates should be out over the relevant time frames.
- Materiality: In financial reports, accountants must attempt to completely reveal all financial facts and accounting information.
- In all dealings, the accountant must act with the utmost good faith.
There has been some type of accounting for as long as cash exists. The codification of double-entry bookkeeping, in which payments were kept in separate columns, resulted in the methods we know today around the 15th century.
During the Industrial Revolution, internal audits were common, but weak financial reporting methods are to blame in part for the economic troubles that led to the Great Depression.
The founding of the United States Securities and Exchange Commission (SEC), which was given the ability to monitor accounting practices in 1934, was one of the reforms prompted by the Great Depression.
The Financial Accounting Foundation (FAF), an autonomous professional accounting organization, is now in charge of developing standards for the SEC.
GAAP was created by the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB), two standards-setting bodies within the Financial Accounting Foundation (FAF).
Why Your Business Should Follow GAAP?
While GAAP is not a government-mandated standard, it is creating through a partnership between government and business. It isn’t necessary for all firms, but it is strongly advised, especially if you aim to go public in the future or if you anticipate raising funds or planning for another transaction soon.
You must follow GAAP in financial reporting if you need to reveal your income reports publicly or if your company is public in the United States. This is by the Securities and Exchange Commission, which mandates yearly external audits by independent auditors.
Companies without outside investors, on the other hand, do not need it.
Even if GAAP isn’t necessary by the government, it can be helpful to companies. This is because it aids in the following:
- Enhance the consistency of financial data and accounting records
- Compile financial statements using accounting records that are complete and consistent.
- Establish a foundation for comparing multiple businesses.
Things to Consider
The purpose of GAAP is to increase the consistency and transparency of financial reporting. They make no assurances that the financial records are error-free or that there are no omissions.
Work with an accountant who can help you maintain the financial standards that are critical to your company’s success. For your small business’s financial needs, work with professionals at Your Part Time Accountant.