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GAAP Accounting Principles: What do they mean? - YouTube
Channel: 1800Accountant
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accounting is a massive and diverse
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field and accounting services can
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include everything from bookkeeping and
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tax preparation to auditing and business
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plan development there's no single path
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or training required to become an
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accountant either
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however there are some grounding rules
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and principles that all accountants rely
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on in all that chaos and there have to
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be if there weren't accountants would be
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outlaws each doing things their own way
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there'd be no consistency no even
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playing field for businesses the
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essential standard foundations for
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accountants in the united states are the
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generally accepted accounting principles
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generally accepted accounting principles
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or gaap are a set of 10 standards for
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all accounting and financial reporting
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practice in the united states
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these standards are described and set by
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the financial accounting standards board
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or fasb an independent nonprofit
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organization while fasb is a private
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organization the federal
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state and industry leaders give it the
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authority to shape accounting's common
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language corporations must comply with
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gaap to be able to trade their shares
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publicly
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any private business will also struggle
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to find investors or apply for loans
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without full gap compliance
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whatever accountant you hire you should
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be able to expect them to follow these
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standards
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the principles of gaap are all intended
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to encourage uniformity in accounting
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practice an accountant should be able to
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glance over two different companies
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business data and easily compare their
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relative financial situations
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gap principles make it an apples to
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apples comparison rather than apples to
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oranges
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the first principle is the principle of
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regularity this means that every
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accountant follows all regulations
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allowing businesses to expect a similar
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service from every accounting
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professional
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next is the principle of consistency
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which refers to consistency in a
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company's accounting over time an
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accountant or business should strive to
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be consistent in their accounting
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process from period to period this lets
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owners and investors compare and
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contrast financial periods with ease
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the principle of sincerity says that
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financial records must be sincere
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reflections of the company's finances an
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accountant should strive for accuracy
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and impartiality in their work this
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makes it unacceptable to manipulate data
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to make a business look better or worse
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than reality
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this principle requires businesses to be
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consistent in the accounting methods and
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processes they use
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the methods chosen should be chosen more
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or less permanently
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if a company uses the accrual accounting
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method for part of their report they
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can't suddenly switch to the cash method
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when it makes their finances look better
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any variation or inconsistency within a
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report or across periods must be
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explained and justified
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the principle of non-compensation is
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another requirement that helps to
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enforce accurate and impartial financial
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statements no entity should be
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compensated simply for delivering a full
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accurate report
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businesses are also not allowed to
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embellish a company's financial
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statement by compensating for debts with
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revenues or other accounts
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according to the principle of prudence
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companies should be prudent and careful
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in reporting their business facts
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financial reports are not a place for
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speculation or wild predictions but
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precise and reliable data
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accounting that follows the principle of
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continuity operates on the assumption
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that the business in question will
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continue to operate into the future
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accountants are to assess and report
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data assuming business continuity
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the principle of periodicity or time
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specificity is concerned with respect
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for clearly delineated financial
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reporting periods
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all credits and debits must be recorded
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accurately according to the time and
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quarter they occurred
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the principle of materiality demands
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that accountants include their records
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and reports all financial data that is
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materially relevant to the company's
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overall finances accountants cannot
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conceal significant expenses this
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principle is also sometimes known as the
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principle of good faith or full
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disclosure
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also known as the principle of honesty
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the principle of utmost good faith
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establishes that all businesses and
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accountants must be entirely honest and
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forthcoming in their financial recording
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and reporting
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this encompasses many of the other gaap
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principles concerned with preventing
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deceit or deception in accounting
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the fasb's 10 standards are the basic
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requirements for public and business
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accounting in the united states but
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they're incomplete in guiding everyday
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accounting work
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the gap principles are bare minimum
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rules
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beyond these rules there are other norms
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and professional standards that should
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be common among all accountants
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these principles are not legal
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requirements for businesses
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except for where they overlap with gap
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but they are essential foundations for
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effective and efficient accounting
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practice
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if your business hires an accountant to
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work with you you should expect the
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accountant to work according to these
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guidelines
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the first principle of effective
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accounting is the full disclosure
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principle this means that an accountant
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reporting on a company's finances should
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not only be accurate and impartial but
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complete
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you should disclose everything relevant
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to a company's finances including all
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losses pending lawsuits potential audits
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and anything else that helps provide
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context
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financial statements and reports are
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intended to present your company's
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information as effectively and
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transparently as possible
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you or another owner can then use that
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information to guide business decisions
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or an investor can use the information
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to evaluate the company's potential
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full disclosure ensures that the data is
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complete
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the economic entity principle suggests
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careful attention to the separation
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between the businesses economic entity
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and the owner's personal finances
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business finances should be recorded and
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reported entirely separately from any
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costs that aren't business related
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ideally personal and business accounts
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should never be intermingled
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but recording them separately is
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essential no matter what
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this assumption states that every
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expense revenue and accounting document
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must be dated according to its time
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period and a specific date if you
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produce a statement recounting your
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accounts receivable it needs to be clear
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that they are your accounts receivable
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as of the current date periodic
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financial statements and reports are
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essential for good planning and growing
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your business but dating is critical
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your business is constantly in motion so
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a balance sheet printout will quickly go
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out of date
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according to the monetary unit
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assumption
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accounting should be concerned only with
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things that can be expressed in monetary
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units
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in the u.s this means that there must be
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a dollar value for an object or expense
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to be included in the ledger
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the cost principle reminds you that
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every sale or purchase needs to be
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recorded according to the exact cost at
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the time if the value of the product or
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service changes between the moment of
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purchase and recording the transaction
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you need to be careful to accurately
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record the exact amount of money that
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was actually exchanged
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materiality refers to the relevance of
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an expense to the core of the business
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and the basic profit margins
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accountants using the principle of
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materiality can be flexible in how they
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report an expense according to its
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relevance
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this principle is key to double entry
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bookkeeping your accounts receivable and
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accounts payable should match
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revenue and expenses should both be
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recorded simultaneously at the time the
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exchange occurs
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the going concern principle states the
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expectation that a business will
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continue to exist if a business is
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stable and relatively healthy it is a
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going concern
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this means the company can take its time
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paying debt or holding on to inventory
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if financial warning signs suggest that
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a company is no longer a stable going
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concern that requires immediate
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attention to debts and other obligations
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that could otherwise be deferred
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the revenue recognition principle
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requires consistency in the way that new
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revenue is recognized and then recorded
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if a company records revenue when it is
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earned as opposed to when the money
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itself is received it becomes even more
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important that clear criteria are
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established
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care and consistency in this process
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helps to ensure you track revenue
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accurately and efficiently collect the
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money you're owed
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accountants follow the conservatism
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principle by being cautious and
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conservative with their estimates and
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projections
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one of the problems of accounting is
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that there are always going to be
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ambiguities if records are incomplete or
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lost or if the complexity of the
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situation leaves the accountant with
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multiple options
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it is up to the accountant to make a
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judgment
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the conservatism principle suggests that
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the safest thing is to underestimate
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income rather than overestimate it
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as noted above the generally accepted
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accounting principles established by
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fasb are specific to the united states
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businesses operating internationally
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must comply with a separate set of
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regulations known as the international
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financial reporting standards ifrs like
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gaap the ifrs standards are meant to
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provide a common accounting language so
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that business finances can be reported
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compared and evaluated with ease
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the us is not the only country to have
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their own standards separate from the
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ifrs but over 120 countries use the ifrs
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standards
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there are various mostly small
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distinctions between these sets of
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standards for example the gaap
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principles are more restrictive in how
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they define what counts as revenue or an
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expense while the ifrs standards are
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stricter in how they require businesses
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to account for the current inventory in
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their reporting if you're concerned
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about the differences in these standards
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or uncertain how they might apply to you
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an accountant can help you figure out
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what you need to know the gap principles
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are primarily defined by the financial
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accounting standards board but they are
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enforced and regulated by a web of
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overlapping organizations and
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authorities
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the federal securities and exchange
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commission
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the sec and the american institute of
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certified public accountants aicpa also
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play important roles
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so if you and your accountant find
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yourself in an ambiguous accounting
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dilemma and you're uncertain about how
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to best follow the gap principles you
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need to know which authorities to pay
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attention to
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this is where the hierarchy of generally
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accepted accounting principles comes in
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when you're seeking clarification you
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should start by looking at resources
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from the top of the hierarchy if you
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can't find what you're looking for there
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you can start going down the list
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fasb statements as well as rules
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interpretation publications from the sec
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and aicpa board opinions or research
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bulletins fasb technical bulletins and
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fasb approved accounting guides and the
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statements from the aaicpa
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for the most part state and local
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governments using gaap principles have
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no authority over whether small
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businesses comply with gaap principles
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however many states use gaap principles
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for their accounting and many also
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require other governmental entities to
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use them
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city and county governments even many
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school districts must comply with gaap
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regulations if required by their state
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in this case it is not the sec that will
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enforce the rules directly but the state
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government auditing and supervising
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other government entities
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consult with your accountant and local
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supervisory authorities if you're unsure
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what your accounting standards should be
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gaap principles established by fasb are
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most important for publicly traded
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corporations
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any business that wants to sell shares
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to the public must regularly submit gaap
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compliant reports approved by audit
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this is supervised by the sec at the
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federal level
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for most small businesses however there
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is no governmental authority that is
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going to punish you for failing to
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comply with gaap instead you'll find
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gaap is more important for appealing to
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investors and banks
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most businesses will find it very
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difficult to secure a loan or convince
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an investor of the health of your
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business if you fail to submit financial
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statements that follow gap
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complying with gaap accounting
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principles in your own accounting will
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ensure that you're prepared when and if
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you need to go to a financial
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institution for support the clear and
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reliable data will also help you stay
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informed and make better decisions about
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the future of your business
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the gap principles are a set of
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aspirational standards they establish
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what is and isn't ordinary an ethical
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accounting practice but that doesn't
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mean they work to make all accounting
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honest and accurate all the time
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many businesses regularly try to subvert
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these regulations by dishonestly
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omitting or adjusting data and then
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presenting it as a gap compliant report
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sometimes businesses may make errors in
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their accounting and end up
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misrepresenting the facts by accident as
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well
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even the most ethical and honest
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businesses may also need to deviate from
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gaap at times for specific purposes
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outside of their regular gaap compliant
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financial reporting businesses may also
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produce pro forma financial statements
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to help with planning or appeal to
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investors
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pro forma financial reports are
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concerned with making predictions and
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projections about what a company's
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finances will look like in the future
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because gaap principles are concerned
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with reporting facts and not speculation
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pro forma projections must necessarily
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go beyond gaap in order to make
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predictions
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accounting is incredibly important for a
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business and the generally accepted
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accounting principles are one of the
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things that make it more complicated the
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good news is you don't have to do it on
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your own
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start working with an accountant and let
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them take care of it for you
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any accountant you hire should already
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know how to work according to these
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guidelines and help you understand them
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as well
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an accountant can help small businesses
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succeed with effective and efficient
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financial planning and reporting
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you
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