What is GAAP ?
GAAP is an abbreviation which stands for Generally Accepted Accounting Principles. GAAP is a set of standard accounting practices and general industry practices developed over the years.
Companies utilize GAAP to:
Make sure that their financial data is organized correctly into accounting records.
Condense the accounting data into financial statements and Provide specific supporting information.
One of the primary reasons to use GAAP is to ensure that anyone looking at the accounts of several businesses has a solid basis for comparing them since every company using GAAP have prepared their financial statements based on identical guidelines.
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Sources of GAAP
GAAP derives from the declarations of several accounting organizations sponsored by the government among them is the (FASB) Financial Accounting Standards Board is the most recent. They also issue pronouncements through the Securities and Exchange Commission also issues accounting pronouncements in Accounting Staff Bulletins and other announcements that apply only to public-owned companies and that are believed to fall under GAAP.
GAAP is codified in The Accounting Standards Codification (ASC) and is available on the internet and (more easily) in printed format.
GAAP is a wide range of subjects that include:
Financial Statement Presentation
Derivatives and Hedging
Specific accounting for industries, such as extractive activities, airlines, and health care. The accounting for specific industries that is allowed or required by GAAP can differ significantly from the standardization for specific accounting transactions.
Main GAAP users
GAAP is the most commonly used accounting method used by companies that report their results for financial reporting across the United States. International Financial Reporting Standards, or IFRS is the accounting system used in many other nations. GAAP is more rules-based than IFRS.
IFRS concentrates more on the general principles of GAAP which results in it easier to understand the IFRS corpus of research smaller, simpler, and easier to understand as compared to GAAP. Because IFRS is still in the process of being developed, GAAP is considered to be the more complete accounting framework.
GAAP convergence with IFRS
There are various working groups which are slowly diminishing the differences between GAAP and IFRS accounting systems. In the end, there will be minimal distinctions in the reported results of a company if it chooses to switch between both. There is a clear intention to merge GAAP into IFRS however, it hasn’t happened yet.
Due to recent disagreements that have arisen in several joint projects, it’s likely that the frameworks will not be combined. The term “financial reporting” is the method that provides information regarding the financial situation and the operational performance of a business (public as well as private) or not-for-profit entity as well as a state or local government.
Particularly, financial reporting contains the following data:
Position of the financials (balance sheet and statement on net position)
Operations results (statement of revenue and charges and adjustments to net positions, statements of total income statements, etc. ), and Disclosures.
The accounting standards created and set in the Financial Accounting Fund’s (FAF) standards-setting Boards — the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB)–determine the manner in which financial statements are made. They are also referred to as the Generally Accepted Accounting Principles or GAAP.
For all companies, GAAP is based on established principles, objectives and guidelines and guidelines that developed as time passes to regulate the way financial statements are created and presented. For non-profits or companies GAAP is formulated to provide information that is beneficial for lenders, investors or other entities that offer or could provide resources.
A second goal applies to the financial reporting of the state and local authorities: to make available information that allows taxpayers and other people who rely on financial statements issued by the government to hold government accountable.
GAAP is a blend of standards that are authoritative (set through policy committees) and the commonly accepted methods for recording and reporting accounting data. GAAP seeks to improve the consistency, clarity, and comparability of the reporting and reporting of information about financials.
GAAP can be distinguished from pro forma accounting that is a financial reporting method that is not GAAP. In the international context, the equivalent of GAAP within the U.S. is referred to as International Financial Reporting Standards (IFRS). IFRS is currently being used in 166 countries.
GAAP includes principles on:
Recognition: What items should be recognized within the financial statement (for example , as revenue, assets, liabilities, and expenses).
Measurement – what amounts should be disclosed for each element in the financial statements?
Presentation: What line items or Subtotals and totals should be shown within the statements of financials and what ways can they be combined in the financial statements
Information on disclosure: what specific information is crucial to the readers of those financial documents. Disclosures can be used to support and provide explanations of the amounts contained in the financial statements.
10 Principles of GAAP
1. Principle of Regularity
Mainly accountant should adhered to GAAP rules and a regulations as a standard.
2. Rule of Consistency: GAAP certified accountants adhere to the established guidelines and rules and.
Principle of Consistency The principle of consistency is applied in all aspects of financial reporting.
3. The Principle of Integrity: GAAP-compliant accountants have a commitment to precision and integrity.
4. The Principle of Permanence of Methods. The use of consistent procedures is to prepare all financial reports.
5. The principle of non-compensation : is that all aspects the performance of an organization, either positive or not, is documented without the possibility or compensation from debt.
6. The Principle of Prudence : states that speculation should affect the reporting of financial information.
7. The principle of continuity: values are based on the assumption that the company’s operations will continue.
8.Principiality of Periodicity: The reporting of income is divided into traditional accounting dates, such as fiscal quarters or fiscal year.
9.The Principle of Materiality is that financial reports completely detail the financial situation of the company.
10. Principle of Absolute Good Trust: The parties are presumed to be honest.
GAAP compliance helps make the financial reporting process clear and establishes a standardization of assumptions, terminology definitions, and methods. External parties are able to easily compare financial statements produced by GAAP-compliant organizations and ensure the sameness, which permits swift and precise cross-company comparisons.
Since GAAP standards offer transparency and consistency, they allow investors and stakeholders to make informed and based, fact-based decisions. The uniformity of GAAP compliance also permits companies to better evaluate the strategic business alternatives.
What are the basic Principles of Accounting?
GAAP includes three elements that prevent misleading practices in accounting and practice of financial report. They include Ten accounting rules, FASB regulations and guidelines, and generally accepted industry procedures.
These elements create uniform financial and reporting standards that give prospective and current investors with dependable methods to evaluate the financial health of an organization. Without GAAP accounting standards, accountants can make use of misleading methods to present an inaccurate depiction of a business or company’s financial position.
GAAP comprises of three elements:
Basic Accounting Principles and Guidelines
These 10 guidelines differentiate the business transactions of the organization from personal transactions of its own owners and standardize the currency units that are used in reports and explicitly expose the time frames that are covered by particular reports. They also draw upon the best practices that have been established for costs and disclosure, match the recognition of revenue, expert judgement, and conservatism.
Rules and Standards issued from the FASB and its Predecessor The Accounting Principles Board (APB)
The FASB has an official, accepted, regularly updated, compendium of fundamentals, referred to by the FASB Accounting Standards Codification. The compilation includes standards based on best practices that were previously approved through the APB. These organizations are rooted in historical regulations regarding financial reporting that the federal government enacted in 1929 following the stock market crash that led to the Great Depression.
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