Accounting Tips For You

Generally Accepted Accounting Principles (GAAP) – An Introduction For Beginners

Accounting practices follow certain guidelines and procedures. Such guidelines and procedures are referred to as generally accepted accounting principles (GAAP). GAAP include a combination of legally mandatory standards and commonly accepted ways of calculating financial records. GAAP cover such things as revenue recognition, balance sheet item classification, and outstanding share measurements. The Financial Accounting Standards Board (FASB), the American Institute of Certified Public Accountants (AICPA), and the Securities and Exchange Commission (SEC) provide guidance about acceptable accounting practices.

Although there is some discretion in interpretation of accounting principles, GAAP are based on four general components:

Consistency – All information should be obtained and presented consistently across all periods. If there is a difference in the means of reporting from one period to the next, this must be noted in the financial statements along with a valid reason for the difference.

Reliability – The procedures and results must be able to be replicated by an independent party. This ensures that the business is representing adequate financial records. If procedures and results are not reliable and instead are based on subjective information, they are likely to be disputed.

Disclosure – All relevant information that could influence the understanding and assessment of the financial records of the business should be disclosed in the financial statements. This should include all information that is significant enough to affect assessments and decisions

Comparability – The financial statements and documentations of such in a business must be able to be compared to similar businesses within its industry. This is important so that investors may determine the success of a business in relation to others in its same category.

Relevance – The information obtained from financial statements should provide information that is valuable in predicting the future financial state of the business.

Although adherence to GAAP is not required, it lends credibility with creditors and stockholders because it adds validity to financial statements and prevents financial misrepresentation. Creditors and stockholders are able to get an accurate picture of the financial status of a business and make sound decisions based on the financial records of the business. Furthermore, outside agencies will assume that the business has adhered to GAAP. Also, when a business follows GAAP, management is more able to follow the records in order to make small adjustments within departments or large decisions regarding the financial future of the business. Adherence to GAAP principles also helps to minimize deceptive and criminal practices because it provides guidelines and procedures for ethical accounting practices.

Mary Blomquist writes articles and provides information on business topics. For more information, please visit http://blomarservices.com