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Therefore, those businesses are better off using accrual accounting to eliminate any complexities or discrepancies in reporting. Some local governments allow businesses to choose between cash basis accounting and accrual basis accounting, however GAAP’s language applies specifically to accrual basis accounting. The FASB provides GAAP guidance throughout the United States, and the GASB provides guidance to local governments which differs from state to state. Financial information created using GAAP may be used in federal reporting, investor agreements, audits, and internal decision-making.Īs a means to provide a uniform financial reporting process, GAAP serves as a set of principles that a company applies to their reporting practices. GAAP compliance fulfills these necessities by providing guiding principles and standards that all publicly traded companies are required to implement, creating equitable and reliable data from which financial decisions are made. What is the role of GAAP?īecause the SEC requires larger businesses (25M+), or those that are publicly traded in the United States, to report their financial information, a more comprehensive and universal system is required to encourage accuracy, accountability, and transparency. While it is used specifically in the United States, other countries have similar principal guidelines: The International Financial Reporting Standards (IFRS) which are regulated by the International Accounting Standards Board (IASB). GAAP was created, and is regulated by, the Government Accounting Standards Board (GASB), the Financial Accounting Standards Board (FASB), The American Institute of Certified Public Accountants (AICPA), and the Securities and Exchange Commission (SEC). Income statement (Profit and Loss statement)-The income statement focuses on the revenue and expenses of a company.īalance sheet-This report shows the capital structure of the company: owned assets, investments from shareholders, and liabilities.Ĭash flow statement-A statement of currency exchange over a period of time that can include: cash generated by operating activities, cash equity available after expenditures, modeling of cash availability where no debt (leverage) is present, and reporting of net cash from one time period to the next. GAAP principles and standards are applied to three main financial statements: Publicly traded companies in the United States are required to submit financial information to a non-affiliated certified public accounting (CPA) firm to remain on the stock exchange. Using GAAP, accountants are then able to report the financial performance of a company over a period of time, typically a fiscal year. Some aspects it covers are: procedures on income, expenditures, financial statement presentation, liabilities and assets, and foreign currency. GAAP is a set of principles, standards, and procedures that are applied through the use of an accrual accounting process by an AP department. Knowing what GAAP is and why it is beneficial to your company as a reporting option will make a difference for company growth, investor speculation, and auditor review.
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As a result of the Securities Exchange Act of 1934, the General Accepted Accounting Principles (GAAP) became a set of principles and regulations established to standardize how companies reported on their finances. Among legislation and regulatory boards created to combat the Great Depression, the need for standardized methods of reporting financial data was identified. With the stock market crash of 1929, questions on the ethics and accuracy of financial reporting made by publicly traded companies arose.