All You Need to Know about GAAP
While this may be elementary for some readers, we wanted to take a minute to cover some of the basics of GAAP (Generally Accepted Accounting Principles) and talk about why they’re important.
GAAP are the concepts, principles and procedures developed by the FASB (Financial Accounting Standards Board) intended for use by all organizations (including non-profit, private and public corporations, partnerships, etc) in the preparation and presentation of their business income and expense, assets and liabilities on their financial statements.
They are primarily concerned with accurately presenting the financial position (balance sheet), operations (income statement and changes in stockholders’ equity), and going concern of a business (assumption that it will last indefinitely).
GAAP have been built on the most effective and respected accounting practices of industry leaders. Through a process of collaborative evolution, these standards stand on a solid bedrock of historical performance. That’s why their proper implementation and application are so critical to today’s business. Failure to comply with these prescribed standards is welcoming the failures and mistakes these practices have learned to overcome.
As these principles do change over time, it is important to understand and heed the flow of updated information from their sources. These include statements by the Financial Accounting Standards Board, regulations for companies listed by the Securities and Exchange Commision (SEC) and advanced arising from industry best-practices employed by both private and public companies.
GAAP include accounting rules for dealing with inventory, depreciation, leases, bad debts, pensions, intangible assets, bonds, equity, taxes and more. They also include accounting principles for handling business concepts defined as follows:
- consistency – once a business has a fixed method for the accounting treatment of an item, it agrees to enter all similar following items in the same way
- continuity – assuming the business will not be interrupted when stating financial information
- disclosure – providing sufficient information such that the financial statements themselves are not misleading;
- materiality – the “magnitude” of the cost of an asset or item used to determine how it should be written off – smaller, less expensive items are generally expensed on a one-time basis and larger, more expensive items are capitalized and depreciated over several years;
- periodicity – each accounting entry should be allocated to a designated period and split accordingly
- permanence of methods – allows the coherence and comparison of published financial information
- prudence – displaying the financial reality “as is”, without exaggeration
- regularity – conformity to the enforceable rules and laws related to accounting
- sincerity – the accounting unit reflects the reality of the company’s real financial status
- utmost good faith – all information is disclosed to the insurer before a policy is signed
As you can see, GAAP has made considerations for a vast multitude of scenarios and real-world accounting challenges. Their adoption provides an education for the organization wise enough to do so. We are ready to help you apply them to your organization. Call us today, (866) 496-2042.