Understanding GAAP: Generally Accepted Accounting Principles
GAAP (Generally Accepted Accounting Principles) is a set of rules and regulations that govern the preparation of financial statements in accordance with accepted accounting practices.
It is an accounting standard developed by the Financial Accounting Standards Board (FASB). It establishes what types of information should be included in financial reports, what form it should take, and how it should be presented to ensure consistency among organizations.
GAAP provides investors, lenders, creditors, and other stakeholders with reliable information about what a company owns or owes at any given time. By following these standards for reporting financials, businesses can create fair representations of their performance over time.
10 Key Principles of GAAP
Principle of Regularity
This principle requires that all accounts and financial statements be prepared consistently, free of innovative or inappropriate accounting practices. This ensures uniformity among different organizations and helps to ensure accuracy in the reported financials.
Principle of Consistency
This principle requires that once an accounting method has been adopted, it must be consistently applied from one period to the next. This helps stakeholders understand what changes may have occurred and what has remained the same over a given period.
Principle of Sincerity
This principle emphasizes honesty in financial reporting by requiring that financial information be presented in a manner free from distortion or exaggeration.
Principle of Permanence
This principle states that the same accounting methods should be used consistently from one period to the next. Any changes must be reflected in the financial statements for full disclosure purposes.
Principle of Non-Compensation
This principle prohibits offsetting losses against gains when presenting financials; all losses and gains must be reported separately.
Principle of Prudence
This principle requires that income and expenses should only be included in reports when they are certain to occur so as to avoid overstatement of profits or understatement of losses.
Principle of Continuity
This principle states that a business should be assumed to continue in operation until evidence indicates otherwise.
Principle of Periodicity
This principle requires that financials must accurately reflect what has happened during the accounting period they cover and not date back further or project into the future.
Principle of Materiality
This principle states that any information affecting stakeholders’ decision-making must be disclosed in the financial statements, regardless of its size.
Principle of Disclosure
This principle allows for more flexibility than other principles as it allows companies to choose what information is available to their stakeholders, provided it does not contradict GAAP’s standards for what must be reported and when it should be reported.
What is GAAP used for?
GAAP is used for creating financial statements that accurately reflect a company’s performance and position. These financials are used to inform stakeholders about the company’s current assets, liabilities, income, expenses, and overall financial health. For publicly traded companies, this information is also used by stock analysts and investors to make informed decisions about buying or selling shares.
The GAAP standards provide guidance on what types of information should be included in the financial statements, what form it should take (e.g., balance sheets, income statements), what format it should be presented in (e.g., single-step or multi-step income statement), what methods of accounting are acceptable (e.g., cash basis or accrual basis), what terminology should be employed to describe earnings and expenses (e.g., operating income vs. gross profit), what disclosures need to be made (e.g., changes in accounting policies), as well as how any nonrecurring items must be reported such as gains or losses from discontinued operations and extraordinary items.
Overall, GAAP provides essential guidance on a range of key concepts that allow investors and other stakeholders to fully understand a company’s finances over time so that they can make sound decisions regarding their investments or other business matters related to the company question.
How to Learn GAAP
Learning Generally Accepted Accounting Principles (GAAP) can be a complex and time-consuming process. While some basic accounting knowledge can be helpful, it is not essential to learn GAAP.
Formal training or coursework is often needed to understand GAAP in detail as it provides an in-depth look into what it stands for and entails. Many universities offer courses focusing on GAAP so that students can understand what it is and what it involves. Students will get a comprehensive overview of the principles and their application through these courses. Moreover, they will learn what information should be disclosed in financial statements according to the rules of GAAP.
Professional certification programs such as Certified Public Accountant (CPA) provide opportunities for those looking to become more deeply familiar with the standards of GAAP. By taking such exams, individuals can gain greater insight into what accounting practices are accepted under this system. This kind of knowledge is invaluable for those who wish to work in public accounting or audit firms since these organizations are often required to adhere strictly to the standards set out by GAAP.
Accounting & Finance Career Opportunities
Whether you’re an expert in GAAP or not, we can help you find the next step in your accounting or finance career. At Burchard & Associates, we help connect accounting and finance professionals in the St. Louis area and beyond with excellent career opportunities. Check out our current job openings or contact us today to learn how we can help you with your job search.