Generally Accepted Accounting Principles: What Are They?
The field of accounting is vast and varied. Accounting services can range from auditing and the creation of corporate plans to accounting and tax preparation. Additionally, there is no set route or level of education needed to become an accountant. Despite the turmoil, all accountants are guided by a few fundamental laws and principles. There must be, too! If not, accountants would all be lawbreakers who did things their way. There wouldn’t be any predictability and no level playing field for companies. The Generally Accepted Accounting Principles serve as the fundamental standard foundation for accountants in the United States.
Generally Accepted Accounting Principles: What Are They?
The rules known as “Generally Accepted Accounting Principles,” or GAAP, apply to all accounting and financial reporting procedures in the US.
The Financial Accounting Standards Board (FASB), a completely independent nonprofit organization, defines and sets these standards. Although FASB is a private organization, federal, state, and industry leaders grant it the power to influence the terminology used in accounting.
For their shares to be publicly traded, corporations must adhere to all GAAP rules. Without complete GAAP compliance, any private corporation will find it difficult to attract investors or submit loan applications.
You should be able to anticipate that any accountant you choose will adhere to these criteria.
What Are the GAAP Principles?
All of GAAP’s guiding principles are designed to promote consistency in accounting procedures. An accountant should be able to quickly assess the respective financial positions of two different organizations by looking over their business data. That is made possible by GAAP principles.
1. Rule of Regularity
The notion of regularity is the first GAAP tenet. This implies that every accountant complies with all laws, enabling businesses to anticipate a consistent level of service from every accountant.
2. Consistency Principle
The accounting principle of consistency is the next, and it refers to a company’s accounting being consistent across time. The consistency principle should be applied consistently by an accountant or company from period to period. Owners and investors can easily compare and contrast financial periods as a result.
3. The Sincerity Principle
According to the accounting concept of sincerity, financial records must accurately reflect the company’s financial situation. In their profession, accountants should aim for accuracy and objectivity.
4. The Permanent Methods Principle
Businesses must follow this GAAP guideline and be consistent in their accounting practices. The techniques picked should be more or less chosen forever. A corporation cannot abruptly convert to the cash method just because it makes their finances look better if they are using the accrual accounting technique for a portion of their report. Any difference or disagreement inside a report or between periods needs to be justified and explained.
5. The Non-Compensation Principle
Another condition that aids in enforcing truthful and impartial financial accounts is the principle of non-compensation. No organization should receive payment merely for submitting a thorough report. Additionally, it is forbidden for businesses to fudge a company’s financial statements by offsetting debts with profits or other accounts.
6. The Prudence Principle
According to the prudence principle, businesses should exercise caution while disclosing their financial information. Financial reports should only contain accurate and trustworthy data rather than conjecture or bold predictions.
7. The Continuity Principle
The assumption behind accounting that adheres to the continuity principle is that the relevant business will stay in operation for the foreseeable future. Accounting professionals must evaluate and present data while presuming business continuity.
8. The Periodicity Principle
The respect for clearly defined financial reporting periods is addressed by the periodicity, or temporal specificity, principle. According to the date and quarter that they occurred, all credits and debits must be precisely recorded.
Difference between IFRS and GAAP
The Generally Accepted Accounting Principles developed by FASB are particular to the United States, as was already mentioned. International Financial Reporting Standards are a distinct set of rules that apply to companies doing business globally (IFRS). The International Accounting Standards Board is responsible for issuing the IFRS (IASB).
The IFRS standards are designed to establish a common accounting language, much like GAAP, to make it simple to report, compare, and assess firm finances. Although more than 120 nations utilize the IFRS standards, the United States is not the only nation with standards that are distinct from those of the IFRS.
These two sets of standards differ in several ways, most of which are minor. For instance, the definition of what constitutes revenue or a cost is more limited under GAAP guidelines. The IFRS standards are more stringent in terms of how they want enterprises to report on their current inventory.
But lately, more and more businesses are switching from GAAP regulations to IFRS. Since the early 2000s, the IASB and FASB have both been striving to combine the two standards. Because of this, the SEC has decided that non-U.S. corporations with U.S. registrations are no longer required to comply with GAAP if they already do so. Before the judgment in 2007, non-American businesses who traded on American exchanges had to produce financial statements that complied with GAAP.
An accountant can assist you in determining what you need to know if you have questions about the variations in these standards or are unsure of how they could relate to you.
Requirements for GAAP by State
State and local governments that follow GAAP norms typically lack the power to enforce GAAP compliance on small firms. However, a lot of states employ GAAP accounting concepts, and a lot of them mandate that other governmental organizations do as well.
If required by their state, city, and county governments as well as many school districts must adhere to GAAP requirements. In this instance, the state government will audit and oversee other governmental bodies rather than the SEC directly enforcing the requirements.
Hire an Accountant Right Now
The Generally Accepted Accounting Principles are one of the elements that make accounting more challenging despite how crucial it is to a company. The good news is that you don’t have to handle it alone. Get an accountant on board and let them handle it for you!