What you need to know about GAAP

Generally Accepted Accounting Principles or GAAP is basically a set of accounting rules, standards, principles and procedures used by businesses to report financial data. Some standards stipulated in the GAAP, such as those set by specific boards must be observed with strict adherence. These are standards that are commonly being used in reporting statements.
 
GAAP consists of a hundred different components. Among the most important components are Debt, Goodwill and other intangibles, Inventory costs, Long-term investments, Profits, Revenue and Sales, Stockholders' equity, Short-term investments and Taxation.
Businesses that use GAAP in making financial reports are most likely to achieve consistency in their data. GAAP covers various aspects of financial reports, which makes it easier for you to look over the details that you need. In addition, the business will have a lesser chance of misrepresenting their figures.
 
Since its creation in the 1930’s, GAAP’s mission has always been to regulate accounting methods in order to achieve uniformity in all businesses. Alternative methods, however, are still allowed for some of a business’s basic expenses. It does not require any test to determine which method is preferable to the other. Furthermore, a business can freely select which method it wishes to use provided that it should choose which methods to apply for its cost of goods sold and depreciation expenses.

A general accounting method has been established without any alternative method for sales revenue and other expenses. However, a business has the freedom to implement these methods or not. It could be that a business implements these methods in a conservative approach or that another business does so otherwise. This results to a highly diversified measure among the businesses profit and financial statement.

While it has been a common assumption among many businesses for accountants to be bound by the GAAP, which are said to be rather inviolate, it still subject to interpretation because it is, by nature, only a set of standards – meaning, the same can set of data can be shown in different ways and can mean other things. For one, GAAP allows specific accounting methods as alternatives for certain revenue and expenses for some types of businesses. Timing is also required an important factor in GAAP methods’ decision in recording revenue and expenses, otherwise, key factors may be quantified. The use of careful estimates as well as sound judgment and interpretation are key factors that are needed in decision making for revenue and expense timing.

Be aware of a business that does use GAAP as basis for their financial reports – they may be hiding something from their investors or the public. Also, there may still be a possibility for businesses to misrepresent their figures even when it has already conformed to GAAP procedures.

GAAP’s pronouncement, which is prepared by the Financial Accounting Standards Board, (FASB) has now reached over a thousand pages long. That still does not include the federal regulatory agency’s rules and regulations and the Security and Exchange Commission’s authority over accounting methods and financial reporting on publicly owned businesses.