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Understanding Generally Acceptable Accounting Principles (GAAP)

By Analytix Editorial Team

March 7, 2022 0 Comments
Understanding Generally Acceptable Accounting Principles (GAAP)

Generally Acceptable Accounting Principles (GAAP) are a set of common accounting principles, standards, and procedures that must be adhered to by public companies in the U.S. when preparing financial statements. These are issued by the Financial Accounting Standards Board and are driven by the need to maintain consistency and clarity in communication-related to financial information.

The main aim of GAAP is to ensure the financial statements and accounting records of a business based in the U.S. are consistent. This is achieved through assessing and measuring the financial activity that a business has experienced within a particular period. GAAP also ensures transparency through appropriate disclosure of financial activity.

What does this mean for a business?

GAAP compliance is significant if yours is an ambitious, fast-growing business looking to list on the stock exchange.

The U.S. Securities and Exchange Commission (SEC) requires compliance with GAAP for accounting and financial reports. The SEC stipulates that GAAP-compliant financial statements be filed if businesses are to remain publicly listed on the stock exchanges.

GAAP-compliant financial statements can be an annual requirement for non-publicly traded companies because lenders and investors favor it.

GAAP principles

Ten principles make up GAAP for accountants and businesses handling accounting and bookkeeping:

Concept

What it Tells

Principle of Regularity

Adherence to GAAP regulations.

Principle of Consistency

From one period to the next, standards are adhered to, enabling comparison between financial time periods.

Principle of Sincerity

Reporting the company’s financial status.

Principle of Permanence of Methods

Maintaining consistency in financial reporting, enabling a comparative assessment of financial health between time periods.

Principle of Non-Compensation

Reporting and documenting positive and negative aspects of financial health without the possibility of debt compensation.

Principle of Continuity

Valuation of assets will be undertaken assuming that business operations will continue.

Principle of Periodicity

Entries must follow the relevant accounting time period.

Principle of Materiality

Financial reporting will contain a complete disclosure of financial and accounting information.

Principle of Utmost Good Faith

All involved entities will act in good faith and conduct transactions in complete honesty.

Leveraging professional accounting assistance

When preparing your company to grow, it is essential to factor in professional advantage in accounting and bookkeeping.

Because of its accounting significance for both listed and non-listed companies, most businesses in the U.S. adhere to GAAP when preparing financial statements.

Ensure financial documents are prepared by people who understand GAAP principles and regulations.

Diligently preparing GAAP-compliant financial statements for small to mid-sized companies may be challenging. Outsourced assistance, especially professional accounting services, can fill this gap and ensure streamlined, compliant bookkeeping and accounting and accurate financial statements. Consider some of the benefits of outsourcing critical yet time-consuming bookkeeping and accounting tasks:

  • Streamlined daily operations, including basic bookkeeping tasks
  • Utilizing teams of qualified individuals who have years of experience
  • Insightful accounting, including preparation of financial statements, budget, and forecasts
  • Enhanced accuracy and reliability in financial management
  • Empowered and informed business decision-making based on a comprehensive view of the financial health of the business

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