US GAAP Accounting: The Generally Accepted Accounting Principles (GAAP) in the United States of America, and how to conform with the US accounting principles.
The US GAAP Accounting and financial reporting is the language used to communicate information about the financial and operational condition of a company, whether a public or private, not-for-profit organization or state or local government.
Financial reporting includes, in particular, the financial position (balance sheets, statements of net position), and the results from operations (statement revenue, expenses, changes in net position, the statement on comprehensive income, disclosures, etc.)
These financial statements are prepared according to the accounting standards established by the Financial Accounting Foundation’s standard-setting Boards, the Financial Accounting Standards Board(FASB), and the Governmental Accounting Standards Board(GASB). These standards are collectively known as Generally Accepted Accounting Principles (or US GAAP Accounting).
The US GAAP accounting principles are applicable to all sectors and organizations.
- The Generally Accepted Accounting Principles are based upon established concepts, objectives, and standards that have been adapted over time to guide financial statements’ preparation and presentation.
- US GAAP accounting can be used by companies and not-for-profits to provide useful information for investors, lenders, and other people who may provide resources.
- Financial reporting under the US Generally Accepted Accounting Principles (GAAP) for local and state governments has an additional objective as to provide information that allows taxpayers and other users of governmental financial statements, to hold governments responsible.
Who set up for the US GAAP Accounting?
The Financial Accounting Foundation (FAF), an independent, private-sector not-for-profit organization, is based in Norwalk (CT) and is responsible for overseeing, administration, financing, and appointment of both the Financial Accounting Standards Board and the Governmental Accounting Standards Board.
The FASB sets financial accounting and reporting standards that apply to public and private businesses, as well as not-for-profit organizations.
The GASB is responsible for establishing accounting and financial reporting standards in the United States (US GAAP accounting) for state and local governments.
- GASB and FASB ensure that US GAAP is a high-quality standard of financial reporting. This allows investors, lenders, capital providers, and others to have the information they need in order to make informed decisions.
- The FASB sets financial accounting and reporting standards that apply to public and private businesses, as well as not-for-profit organizations.
- The Securities and Exchange Commission recognizes the FASB as the designated accountant standard-setter for public companies.
- Many other organizations recognize the FASB’s standards as authoritative, including State Boards of Accountancy (Rule 203), Rules of Professional Conduct as amended May 1973/May 1979).
- Financial reporting based upon GAAP accounting is used by investors, lenders, and others who use financial information to make financial decisions and help the financial markets function as efficiently as possible.
- The GASB standards are accepted by state and local governments, state Boards of Accountancy, and the American Institute of CPAs.
- The GASB sets accounting and financial reporting standards that are applicable to U.S. states and local governments.
Taxpayers, municipal bondholders, citizens groups members, legislators, and oversight bodies all rely on financial information to make decisions and invest. These standards help government officials to demonstrate their accountability and stewardship of public resources to their stakeholders. US GAAP accounting principles apply to external financial reporting only, not budgeting. This is important for state and local governments. You can find more information about the GASB here.
The missions of both organizations are achieved through a thorough and independent due process. This encourages broad participation and objectively considers all stakeholders’ views. It is also subject to oversight by FAF’s Board of Trustees.
The US GAAP accounting standards explore the process of creating accounting standards, just like home builders.
- The FASB, GASB, and other stakeholders work together to create a high-quality standard.
- To set accounting and financial reporting standards, the GASB and FASB use the following due-process procedures:
- The Board first identifies the financial reporting issue that must be addressed. This is based on suggestions from stakeholders, staff research, and Board members’ concerns. The Board votes to add the project to its technical agenda and then discusses the issue with the public at their meetings.
- The Board drafts and publishes a proposal (in Exposure Draft form) for public comments. The Board may, depending on the complexity of an issue, issue a preliminary discussion paper, invitation to comment, or preliminary views document prior to the Exposure Draft in order to solicit initial stakeholder input about various approaches and solutions.
- The Board issues a final norm and provides guidance for auditors and preparers of financial statements.
- The Board solicits input from stakeholders via comments letters, roundtables, and meetings. Based on stakeholder input, the Board redeliberates.
- The FAF’s Post Implementation Review team may select a standard that is significant and has been in existence for at least two years (three for GASB standards). This will allow them to assess its effectiveness.
US GAAP Accounting Included Principles
- Recognition: What items should be recognized in financial statements?
- Measurement: What amounts should be reported for each element in financial statements?
- Presentation: What line items, totals, and subtotals should be shown in the financial statement? How can items be combined within the financial statement?
- Disclosure: What information is most important for the users of financial statements? Disclosures can be used to explain or supplement the amounts in statements.
The US GAAP Accounting Principles
- Principle of Regularity: An accountant must adhere to these rules and regulations on a regular basis.
- Principle of Consistency: One of the key points. Business professionals and accountants agree to use the same standards for all reporting, regardless of whether it is period or not. This ensures consistency and helps to prevent errors. Accounting professionals who use different standards in reporting are expected to disclose and explain why they used them.
- Principle of sincerity: This is a commitment to do an honest, objective job. An accountant provides accurate information about a company’s financial position.
- Principle of permanently of methods: Another one is about consistency. Financial reporting procedures should be consistent. They should present a cohesive picture of the business and allow for comparisons to other businesses.
- Principle of non-compensation: An accountant will show all accounting details, including negative and positive, without trying to compensate for one. Separate assets and expenses are kept separate from debts, while revenue is separate from expenses.
- Principle of Prudence: Prudence is wisdom, good judgment, and common sense. GAAP expects financial data representation that is fact-based and grounded to be used in this context. Don’t make it more impressive.
- Principle of Continuity: When valuing assets it is important to assume that the business will continue operating (and not be sold immediately, for instance). Assets are valued at their historical value and not at their disposable value.
- Principle of Periodicity: Each financial transaction should be limited to a single time period. If an entry is for multiple time periods (e.g., an upfront payment of a subscription), the revenue should be divided and recorded over the appropriate time periods. This is known as revenue recognition.
- Principle of materiality or full disclosure: Financial reports must contain all information. There is no hiding or reserving of information.
- Principle of Utmost good faith: Honesty is the best policy. GAAP assumes that accountants and businesses are being truthful in their reporting.
Accounting standards are used by governments, companies, not-for-profit organizations, and government agencies to provide financial statement users with the information they require to finance, lend, donate, or assess how tax dollars are being spent.
Citizens and investors trust financial statements that conform to GAAP. They use this information for financial assessments and to determine the effectiveness of a government or organization’s management of its resources.
US GAAP Accounting and financial statements are prepared using standards that have been developed through an open and robust process. This results in:
- Relevant, representative, and reflective of economics
- Comparable to other governments or organizations
- Auditable by a third party and verifiable
- Lenders, investors, donors, taxpayers, among others, understand this concept.
Our capital markets can function efficiently only if we have high-quality financial reporting standards in GAAP.
- GAAP’s high-quality financial reporting standards are crucial to the efficient operation of capital markets. US GAAP Accounting Principles, for example, provide better financial information that can be used by governments and organizations in the following ways.
- It will help governments demonstrate the stewardship of their government’s resources to citizens and bondholders.
- Companies and other organizations need to report financial information so that lenders, investors, donors, and others can trust it.
- Greater comparability in accounting and financial reporting also results in better financing decisions–investors, lenders, and donors make wiser decisions about where to put their money.
- Superior financial accounting and reporting standards lead to better information on the market. Transparency is promoted by better information.
- Investors and lenders can make more informed decisions about where they want to invest their money. Transparent and relevant information is a key ingredient in making better decisions.
- Recognizing the importance of financial information, investors support a fair and inclusive standard-setting process. This “virtuous circle” ultimately makes capital markets more efficient, robust, and resilient.
Actual US GAAP Accounting Standards
These ten principles are the basis for many concrete standards and processes. The FASB manages these standards and covers such topics as:
- Recognizing revenue
- Classification of balance sheet items
- Amazing share measurements
- Accrual-based accounting
- Hedge accounting
- Non-profit financial reporting
- Credit losses
How to conform with the US GAAP Accounting Standards
The US GAAP Accounting rules are somewhat similar to other standards in the United States. Inches, feet, and miles are all represented in inches, feet, pounds, pounds, and even ounces. These concepts make sense in 50 states but don’t make any sense elsewhere.
The United States uses a different measurement system than the rest of the world. The Imperial system is used by Americans and not the Metric.
You might not be aware that accounting standards are the same. GAAP Accounting, or the Generally Accepted Accounting Principles (GAAP), is applicable throughout the 50 United States.
US GAAP Accounting principles don’t have to be hard-and-fast laws. They are written in legal jargon. There isn’t much accounting or finance jargon. GAAP is written in plain English and contains clear concepts that define integrity in accounting.
These US GAAP Accounting principles combine ethics, legal expectations, best practices, and other proven best practices.
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