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GAAP Explained

As a business owner or manager, you may be aware of the importance of adhering to GAAP. While following this standard is an important practice, it can be difficult to understand for those without a strong accounting background. At SD Associates, P.C., our experienced professionals are well-versed in GAAP and can help you navigate and understand its complexity. Read on to learn more about GAAP and how it affects the landscape of professional finances.

What Is GAAP And Why Is It Important?

GAAP stands for ‘Generally Accepted Accounting Principles.’ It is the standard framework of guidelines for financial accounting for companies in the United States. In other words, it’s a set of rules that govern how businesses record and report their financial information. 

GAAP rules are set forth by the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA). The FASB is a private-sector, nonprofit organization. It should be noted that GAAP is mostly followed only in America – many other countries use the International Financial Reporting Standards (IFRS).

Companies that do not adhere to GAAP standards may find they are experiencing errors or omissions on their financial statements and records. This can directly impact a company’s credibility with parties who rely on financial statements to make decisions, such as investors and lenders. For companies that are required to adhere to GAAP, failure to do so can result in government regulatory agencies levying fines or other punishments against the companies. 

The 10 GAAP Principles of GAAP

1. Principle of Regularity

The CPA or accountant must always use GAAP as the standard, and at no point ignore or modify any of the regulations.

2. Principle of Consistency

CPAs or accountants must commit themselves to using the same GAAP standards throughout the entire process of reporting finances. This principle ensures the financial documentation of a company is consistent over time. If at any point a method, practice, or system is changed it must be fully documented, with the reason given, in the footnotes of the financial statements.

3. Principle of Sincerity

The CPA or accountant must remain impartial and unbiased, and provide an accurate report on a company’s finances.

4. Principle of Permanence of Methods

All financial reporting methods must remain consistent in order to properly compare records. Although this principle is similar to the Principle of Consistency, it focuses specifically on financial reports to ensure one company can easily be compared to another company.

5. Principle of Non-Compensation

All findings, whether positive or negative, must be clearly reported, and all aspects of performance must be disclosed with no expectation of debt compensation.

6. Principle of Prudence

All reported data must be based on facts rather than speculation or hearsay.

7. Principle of Continuity

Asset evaluation is conducted under the assumption that the business in question will proceed to operate in the future, regardless of the current status of the company.

8. Principle of Periodicity

This principle requires financial information be reported only in the relevant accounting period to prevent the misrepresentation of data across time.

9. Principle of Materiality

All financial data should be fully disclosed by the accountant or CPA to the best of their abilities.

10. Principle of Utmost Good Faith

The principle of utmost good faith, uberrimae fidei, is a Latin phrase. This principle serves to maintain an ethical standard by requiring that any person or party responsible for or involved with a company’s finances must be honest in all reports and transactions.

Contact Our CPA Firm Today

At SD Associates, P.C., we understand the complexities of GAAP and can help you navigate its rules. Our CPA firm is here to provide guidance and ensure that your financial reports comply with all applicable standards. Contact us today at (215) 517-5600 for more information or to schedule a consultation.