Intro to GAAP

#5

Let's close our knowledge gap by knowing about GAAP!

WHAT

GAAP - "generally accepted accounting principles"

Three types of rules:

• Basic accounting principles and guidelines
• Detailed standards issued by FASB (Financial Accounting Standards Board) and APB (Accounting Principles Board)
• Generally accepted industry practices

WHEN

• When a company distributes its financial statements to the public - it has to follow GAAP during the preparation of those statements
• When a company's stock is publicly traded - financial statements have to be audited by independent public accountants as per Federal Law

WHERE

• Primarily used by businesses reporting their financial results in the United States.
• International alternative to GAAP:
• International Financial Reporting Standards (IFRS) - set by the International Accounting Standards Board (IASB)

WHY

• Useful - attempts to standardize and regulate accounting definitions, assumptions, and methods
• Consistent - in the methods used every year to prepare a company's financial statements
• Compare - one company to another, w.r.t financial statistics
• Improve - clarity, consistency, comparability of the communication of financial information

HOW

• Accountants commit to applying the same GAAP guidelines throughout the reporting process, from one accounting period to the next, to ensure financial comparability between periods (principle of regularity)
• Accountants must strive to fully disclose all financial data and accounting information in financial reports (principle of good faith)
• Accountants have to fully disclose and explain the reasons behind any modified standards in the footnotes of financial statements (principle of consistency)
• Accountants strive to provide an accurate and impartial depiction of a company’s financial situation (principle of sincerity)
• Accountants must report positives and negatives with full transparency and without the expectation of debt compensation (principle of non-compensation)
• Accountants must assume the business will continue to operate while valuing assets (principle of continuity)
• Accountants must distribute entries (such as revenue) across the correct accounting periods (principle of periodicity)