The GAAP are a commonly known set of accounting standards that were developed by the Financial Accounting Standards Board (FASB) designed to keep companies in conformity with their financial reports so they may consistently be understood by both parties, internal (company management) and external (investors and creditors) to the business. On top of these wonderful reasons, other benefits of conforming with the GAAP include improved:
- Budgeting due to the required accrual basis accounting, this method of matching your revenues with expenses will provide your business with more accurate totals and simpler budgeting without the stress of record based on cash flows.
- Planning Long-term is made easier with GAAP’s requirement of valuating your assets at historical cost on the balance sheet. This will have been the cost your business originally paid while the changes in the asset value are reported as a separate component allowing better decisions of asset purchases.
- Financial Analysis improve if you are comparing your own firm's performance with other firms, GAAP requires those who adhere to it, to state so in the footnotes of financial statements so you can make more accurate comparative analysis.
- Meeting Stakeholder’s Needs, whether you are looking for investors on the stock market of trying to obtain loans from creditors to finance your operations, it will be far easier to prove to these stakeholders the ableness of your business when it is in the standard well known format set by the GAAP.
- Business Sales will roll out with much more ease if you ever decide the time has come to hand over the keys, this can be a complicated process of compiling the correct financial statements and they are often desired in GAAP format.
The set of GAAP principles are described below.
- Principle of Regularity- Accounting must be done by some form of a system that already exists.
- Principle of Consistency -Requires that accountants use a universally accepted system for reporting financial transactions and statements.
- Principle of Sincerity-Requires the accountant in charge of preparing financial statements to do so accurately and as to not attempt misinformation.
- Principle of Permanence of Methods-The use of replicated accounting methods is required for preparation of financial statements to allow comparison.
- Principle of Non-Compensation-Requires that all information is reported with transparency, so the financial position of a business is accurately displayed and all components, good and bad, show.
- Principle of Prudence-Requires that only factual data is reported bey accountants in their work, no opinions, or predictions.
- Principle of Continuity-In order to prepare accurate financial statements, the accountant must analyze businesses previous operations and current assets, then be sure they can confidently assume that the business can continue as they have been.
- Principle of Periodicity-Report information in its relevant time-period, meaning transactions occurred should be reported within the same relevant period.
- Principle of Materiality-All information must be fully disclosed in a GAAP compliant report so that nothing is admitted.
- Principle of Utmost Good Faith- Requires that all parties involved with the formation of the reports act in honest, good-faith.
Who must comply with the GAAP?
In the United States, it is required by the Securities and Exchange Commission (SEC) that all publicly traded companies (Companies listed on the stock exchange) MUST file financial statements in compliance with the GAAP.
Dark Blue = Fully GAAP Compliant: Local and county governments and school districts are required to prepare financial reports under GAAP.
Blue = Mostly GAAP Compliant: Two of three regulated state governing boards and districts must comply to GAAP.
Green = Somewhat GAAP Compliant: One of three regulated state governing boards and districts must comply to GAAP.
Orange = Not GAAP Compliant: Local and county governments and school districts are not formally required to comply to GAAP.
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