If you’re doing accounting tasks for your business, you’ve probably heard of the Generally Accepted Accounting Principles (GAAP), but you may now know exactly what they are. However, applying them will ensure that your business’s finances are represented fairly and accurately. So, what are the principles of GAAP? Read on to learn about the principles and how they should be used for your own accounting practices.
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What is GAAP?
The GAAP principles are a set of ten principles outlined by the Financial Accounting Standards Board (FASB), an independent nonprofit that sets standards for the accounting industry. Businesses that follow GAAP enjoy mutual intelligibility in their accounting, making it possible for those outside a business to easily understand its financial health. By using GAAP, other professionals can efficiently assess whether a business is a good potential partner, qualifies for loan, or carries substantial risk.
The 10 Principles of GAAP
Follow the ten GAAP principles to ensure that you have a view of your business’s financial health that’s consistent with industry standards.
Principle of Regularity
The accountant must strictly adhere to all GAAP rules and regulations.
Principle of Consistency
The same methods of reporting throughout the reporting process must be used and any changes must be disclosed.
Principle of Sincerity
A company’s financial health must be honestly represented in its accounting.
Principle of Permanence of Methods
Reporting methods should be consistent across time and any changes must be noted.
Principle of Non-compensation
Current assets and expenses cannot be used to inflate a business’s finances with prospective debt compensation or revenue.
Principle of Prudence
Only existing information may be used in accounting and nothing that is promised, expected, or speculative.
Principle of Continuity
The accountant assumes that the business will continue to exist.
Principle of Periodicity
Accounting entries remain in their given time period and are not moved to another.
Principle of Materiality
All documents that are necessary to assess the business’s finances properly must be disclosed.
Principle of Utmost Good Faith
The business and all parties that provided financial reports and documents for the business are assumed to be acting honestly and with good intentions.
Is Your Business Compliant with GAAP Principles?
While GAAP is a set of guidelines and not a formal set of laws, many banks and financial institutions will require your business to be GAAP-compliant when applying for a loan or other types of financing. Adopting GAAP now can save you trouble later on when you do want or need to obtain a loan.
GAAP provides an intelligible framework for your own accounting efforts, allowing you and others outside your business to derive insights about the health of your business. By following GAAP, you’ll be able to evaluate your business from the same footing as many other businesses, giving you a true sense of where it stands on the playing field. Following GAAP can also help you to improve your business as you identify areas of improvement. Contact Larry L. Bertsch, CPA & Associates today if you need help in bringing your business to GAAP compliance!