What is GAAP? The short answer is it is the set of rules that govern business finance. Generally accepted accounting principles, or GAAP, lay the foundation for approved practices within the realm of corporate accounting. Businesses must adhere to GAAP guidelines to remain in compliance, so GAAP practices are a useful thing to know.
By law, businesses in the U.S. are required to release financial statements to the general public and as well as their stakeholders. All companies that engage in stock exchanges and indices must follow the 10 GAAP guidelines listed below:
- Principle of Regularity: The accountant has adhered to GAAP rules and regulations as a standard.
- Principle of Consistency: Professionals commit to applying the same standards throughout the reporting process to prevent errors or discrepancies. Accountants are expected to fully disclose and explain the reasons behind any changed or updated standards.
- Principle of Sincerity: The accountant strives to provide an accurate depiction of a company’s financial situation.
- Principle of Permanence of Methods: The procedures used in financial reporting should be consistent.
- Principle of Non-Compensation: Both negatives and positives should be fully reported with transparency and without the expectation of debt compensation.
- Principle of Prudence: Emphasizing fact-based financial data representation that is not clouded by speculation.
- Principle of Continuity: While valuing assets, it should be assumed the business will continue to operate.
- Principle of Periodicity: Entries should be distributed across the appropriate periods of time. For example, revenue should be divided by its relevant periods.
- Principle of Materiality / Good Faith: Accountants must strive for full disclosure in financial reports.
- Principle of Utmost Good Faith: Derived from the Latin phrase “uberrimae fidei” used within the insurance industry. It presupposes that parties remain honest in transactions.
The point of these guidelines is to protect investors by allowing them reliable and transparent insight into a companies finances. While there is no universal GAAP model each business follows the best practices accepted by their specific industry. For example, what works for a bank in terms of accounting best practices is certainly very different than that of a grocery store. However, the same guiding principles exist in either scenario to prevent accountants from creating a misleading picture of a company’s financial profile and disseminating it to investors.
Who Oversees GAAP?
While GAAP regulations were created in response to federal requirements, the government does not oversee GAAP compliance. Instead, a group of organizations and independent boards oversee GAAP and update requirements regularly as business changes over time. Three of the most prominent entities in GAAP processes are the Financial Accounting Foundation (FAF)– an organization created in 1972 and the entity that oversees the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB) The FAF appoints board members and maintains fairness in operation and transparency within the board. FAF organization meetings are open to the public both in person and via webcasts.
GAAP and Your Consultant
Part of why business owners hire consultants is to bring expertise to the project. Competent consultants and grant professionals know the industry best practices and can advise their clients to comply with GAAP protocols. One such protocol is paying for proposal preparation, which many clients do not know must be done at the time of services, not upon award. A good grant professional will be able to advise clients on matters such as these.
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