Understanding the Basics of US GAAP Accounting Principles.pdf

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1. UnderstandingtheBasicsofUSGAAP
AccountingPrinciples
Businessesadheretospecificaccountingprinciplestoabidebyfinancialnormsand
regulationsproperly,acrosstheworld.IntheUSA,GAAPortheGenerallyAccepted
AccountingPrinciplesiswhatbusinessesfollowinthisregard.Publiclytraded
venturesoperatinginthecountrymustcomplywiththeUSGAAPstandards.Entities
failingtoadheretothegenerallyacceptedaccountingprinciplesstandardscanface
seriousrepercussions.
ThedefinitionofUSGAAP
generallyacceptedaccountingprinciplesisacollectionofaccountingguidelinesand
standardsthatpubliclytradedU.S.businesseshavetofollow,aspertheSEC’s
rules.Theyneedittocompileandreportvitalfinancialinformation.Byadheringto
thegenerallyacceptedaccountingprinciples,suchentitiescanproducelegitimate
financialreports.Throughtheseguidelinesandstandards,creditors,investorsand
thegovtorganizationscanassessthefinancialhealthandfunctioningofabusiness.
ThescopeandimplicationsofGAAPaccounting

2. TheFinancialAccountingStandardsBoard(FASB)istheorganizationthatpublishes
andmanagesgenerallyacceptedaccountingprinciplesprotocols.Italsoupdatesthe
nuancesofgenerallyacceptedaccountingprinciples,fromtimetotime.Thepublicly
tradedandregulatedUSbusinessesareunderthelegalobligationtoadhereto
GAAPaccountingprinciples.However,severalprivatecompaniesintheUSAalso
adheretotheseaccountingguidelineswhilemakingfinancialstatements.TheUS
governmentalaccountingentitiesalsotypicallyadheretoGAAPnorms.
AccountingprofessionalsinpubliclytradedUScompanieshavetoadhereto
generallyacceptedaccountingprinciplesprotocolswhenhandlingandcrafting
financialreports.Thissetofregulationsensuresbusinessesacrossvarioussectors
cancomeupwithcomprehensibleandclearfinancialdata.Theyareabletoprepare
comparable,complete,consistentfinancialreports,liabilitydeclarationsandtax
preparationsbyusinggenerallyacceptedaccountingprinciples.
TheimportanceofUSGAAPcompliance
AscompliancewithGAAPaccountingprinciplesismandatoryforUSpublic
companies,theirfinancialstatementsandrecordsmustreflectthisaspect.TheUS
SecuritiesandExchangeCommissionrequiressuchcompaniestocomeupwith
generallyacceptedaccountingprinciples-compliantfinancialstatementsregularly.
Externalentitiesandinvestorsanalyzingthefinancialrecordsofsuchcompanies
alsoseekproperGAAPcompliance.
ForapubliclytradedUSbusinessviolatingtheGAAPaccountingnorms,the
consequencescanbeserious.
●Asignificantamountofmonetaryfinecanbeimposedonthecompany.
●Itsbrandimagewilltakeaserioushit,repellingpotentialinvestorsand
affectingstakeholderconfidenceadversely.
Whilenon-publiclytradedUScompaniesarenotlegallyboundtoadheretogenerally
acceptedaccountingprinciplesnorms,mostlendersandcreditorspreferentities
adheringtothesenorms.MostfinancialorganizationsaskforyearlyGAAP-compliant
financialstatementswhileissuingbusinessloans.
The10MajorGAAPPrinciples
TheUSGAAPisbasedon10keyprinciples.Theseprinciplesareusedtoregulate,
standardize,anddefinethefinancialinformationreportingofaventure.Theirusage
alsohelpsthwartunethicalpracticesanddatatamperingwhilemakingsuchfinancial
reports.

3. ●PrincipleofRegularity
GAAPnormsmustbefollowedbybusinessesandtheiraccountantsatalltimes
whiledealingwithfinancialinformation.Theseregulationscanneitherbechanged
noralteredbyacompanyoritsaccountingstaff.
●PrincipleofConsistency
Accountantsmustusethesamestandardsandprotocolsforallaccountingperiods.
Ifamethodischangedorthecompanyhiresanewaccountantusingadifferent
system,suchchangesmustbedocumentedproperly.Thechangeshouldbepresent
inthefootnotesofitsfinancialstatements.Thisensurestheinternalfinancial
documentationofacompanyremainsconsistentovertime.
●PrincipleofSincerity
Accordingtothisprinciple,anyaccountingteamoraccountanthiredbyacompany
hastoprepareanaccurateandunbiasedfinancialreport.Thisremainsvalidevenif
acompanyispassingthroughadirefinancialsituation.
●PrincipleofPermanenceofMethods
Asperthisprinciple,accountantshavetodeploythesamereportingmethod
protocolsthroughtheentirerangeoffinancialstatementsprepared.Thisensures
anyreportpreparedbyabusinesscanbecomparedeasilytootherreports.
●PrincipleofNon-Compensation
Theaccountingteamofacompanyhastoreportallpositiveandnegativeaspectsin
anyfinancialstatement,nomatterhowthatimpactsthecompany.Accountants
shouldnotcoveruplossesandreportdebtsandrevenuesincorrectly.
●PrincipleofPrudence
Whilemakingfinancialreports,thedatamustbebasedonclear,concretenumbers.
Itshouldbefact-driven,too.Thisprincipleensuresaccountantsstaygroundedwhen
makinganalysisaboutfinancialaspects.Businessescanmakespeculationand
forecasting,butthedistinctionwithformalfinancialstatementsshouldbemaintained.
●PrincipleofContinuity
Whilepreparingfinancialreports,accountantsmustassumetheventurewillkeepon
functioning.Thecompanystatusshouldnotaffectthereportpreparation.

4. ●PrincipleofPeriodicity
Asperthisprinciple,accountantsmustreportfinancialinformationduringthe
relevantaccountingperiod.Forinstance,whenanaccountantispreparinga
quarterlyreportontheventure’srevenue,thereportmustbefocusedonthatspecific
quarter.Thisreducestheriskofdatafudgingacrosstime.Acompanymayearn
moreinonequarterthananotherandthismustreflectproperlyinthereport
preparedbytheaccountant.He/sheshouldnotaltereitherthedataordates.
●PrincipleofMateriality
Accountantsmustdisclosetheavailablefinancialinformationofthecompany,fully
andclearlywhilemakingreports.Theyhavetoacquirethisinformationfromthe
venture.
●PrincipleofUtmostGoodFaith
Anyoneinvolvedwiththefinancialaspectsandoperationsofacompanymustbe
honestwhilepreparingreportsandanalysis.Thisensuresanethicalandtransparent
approachinallfinancialanalysis.
AdditionalGAAPGuidelinesthatmatter
Apartfromthese10majorprinciples,thereare4otheraspectsofUSGAAP
regulations.Businessesshouldmaintainthesewhilecraftingfinancialstatements.
●Recognition-
Afinancialstatementhastoreflectthefinancialcommitments,expenses,liabilities,
andassetsofthecompanyaccurately.Thereshouldnotbeanyomissionsor
modifications.
●MeasurementinUSGAAP-
Financialstatementsmustbemadetomeetgenerallyacceptedaccounting
principlesproperly.Accountantsmustabideby10majorgenerallyaccepted
accountingprinciples,regardlessofthesector.
●Presentation-

5. Everyfinancialreportmusthavetheseparts:abalancesheet,acashflow
statement,anincomestatement,andashareholder’sequity/ownershipstatement.
Theabsenceofanyofthesedocumentsmayleadtoexternalaudits.
●Disclosure-
Anyrelevantandadditionalinformationrequiredtofathomthefinancialreportshas
tobedisclosedfully.Thiscanbeinthereport’sfootnotesordescriptionsection.
GAAPvs.IFRS-what’sdifferent?
WhiletheGAAPistheofficialsetofaccountingguidelinesforpublicUScompanies,
inothercountriesIFRSisoftenthestandardtofollow.InternationalFinancial
ReportingStandards,createdbyIASBisusedinover150jurisdictions,including
nationslikeCanada,Australia,Japan,andtheEU.Itismaintainedandupdatedby
theIFRSFoundation.UScompaniesoperatingacrossmultiplecountriesoftenuse
dualreportingmethodstomakefinancialstatements.
ThemajordifferencesbetweenGAAPandIFRSare:
●Thenotabledifferencebetweenthe2normsisindealingwithaccounting
entries.generallyacceptedaccountingprinciplesandIFRShavevarying
policiesinthetreatmentofinventory.IFRSrulesprohibittheusageofLIFO
(last-in,last-out)inventoryaccountingmethodsbutGAAPallowsit,for
example.
●FinancialpolicymakersandanalystsfeelIFRSisprinciple-centricwhile
generallyacceptedaccountingprinciplesismorerule-based.IFRSguidelines
containfeweroveralldetailscomparedtogenerallyacceptedaccounting
principles.So,theprinciplesandtheoreticalframeworkoftheIFRStendto
lengthyfinancialstatementdisclosures,leavingroomforinterpretations.
●InGAAP,therearenoroomforinventoryreversalsbutinIFRSthiscanbe
allowedundercertainconditions.
TopbenefitsofadheringtoUSGAAPforbusinesses
●Makesplanningearlyeasier-
WithGAAP,businessownersgetaclearpictureofthefinancialhealthoftheir
ventures,andplanaccordingly.
●Helpsmaintainconsistency-

6. BusinessesdeployGAAPtofollowthesameaccountingnormsintheirfinancial
statementsandreports,throughouttheyear,leadingtoconsistency.
●Lowerstheriskoffraud-
Withgenerallyacceptedaccountingprinciples,companiescanreducetherisksof
financialdatamisrepresentationandauditerrors.
●DetailedanalysisofexpenditureinUSGAAP-
BusinessesusingGAAPtopreparefinancialreportscanfathomallnuancesoftheir
expenditureeasily.
●Helpswinthetrustofshareholders-
Whenthestakeholdersofacompanyknowitisadheringtogenerallyaccepted
accountingprinciplesnorms,theirconfidencelevelgetsaboost.
●Helpsattractinvestors-
ForabusinessadheringtoGAAPprotocols,itiseasiertoattractpotentialinvestors
andbusinesspartners.
Summingitup
Overall,GAAPaccountingstandardisthefoundationforbusinessestoanalyzetheir
financialactivitiesandprepareauditandtaxreportswithutmostaccuracy.Theyrely
onthissetofaccountingguidelinestoavoidlegalhasslesandboosttheirimage,
eventually.ToensureGAAPcompliance,US-basedventuresoftenhireace
accountingoutsourcingentities.
Sources:
●https://www.forbes.com/advisor/business/generally-accepted-accounting-princ
iples-gaap-guide/
●https://www.investopedia.com/terms/g/gaap.asp
●https://www.businessnewsdaily.com/5486-generally-accepted-accounting-prin
ciples-gaap.html
●https://chargezoom.com/blog/top-6-benefits-of-gaap-accounting-for-your-busi
ness