Qwiki

Generally Accepted Accounting Principles (United States)

‌
‌
‌
‌
‌
‌

Generally Accepted Accounting Principles (GAAP) in the United States

The Generally Accepted Accounting Principles (GAAP) in the United States are a set of standard accounting rules, guidelines, and procedures used by companies to prepare their financial statements. These principles are critical for ensuring transparency and consistency in financial reporting across different entities.

Origin and Governance

GAAP in the United States is governed by several bodies, the most notable being the Financial Accounting Standards Board (FASB). Founded in 1973, FASB is responsible for developing and issuing the standards that constitute GAAP in the United States. Additionally, the Securities and Exchange Commission (SEC) plays a significant role by enforcing GAAP for publicly traded companies.

Other organizations involved include the American Institute of Certified Public Accountants (AICPA), which provides professional guidance and ethical standards for accountants, and the Governmental Accounting Standards Board (GASB), which establishes accounting standards for state and local governments.

Key Principles and Concepts

GAAP encompasses several key principles and concepts that guide financial accounting:

  • Accrual Basis Accounting: This principle mandates that transactions and events are recorded when they occur, not necessarily when cash is received or paid. This approach provides a more accurate picture of a company’s financial health.

  • Conservatism: In financial reporting, conservatism requires that potential expenses and liabilities be recognized as soon as possible, but revenues only when they are assured.

  • Matching Principle: Expenses should be reported in the same period as the revenues they help to generate, ensuring that financial statements reflect the true profits of a business.

  • Full Disclosure: All information that affects the full understanding of a company's financial statements must be disclosed. This increases transparency and allows stakeholders to make informed decisions.

Deviations and Adaptations

Under Rule 203 of the AICPA's Code of Professional Ethics, accountants are sometimes required to depart from GAAP if adhering to them would result in misleading financial statements. Such departures require disclosure of the reasons and implications.

The SEC also periodically releases Staff Announcements and Observer comments during the Emerging Issues Task Force meetings to provide clarity on specific accounting issues faced by SEC registrants.

International Context

While GAAP is widely used in the United States, other countries often rely on different accounting frameworks, such as the International Financial Reporting Standards (IFRS). These differences can affect cross-border businesses and investments, necessitating adjustments and reconciliations to ensure comparability.

Related Topics

GAAP in the United States remains the cornerstone of financial accounting, serving as a foundation for producing reliable and comparable financial reports essential for investors, regulators, and other stakeholders.