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Reasons Businesses Should Conform to GAAP Accounting Standards

December 6, 2022

Generally accepted accounting principles (GAAP) is the cornerstone of bookkeeping and accounting. These accounting standards aim to create a transparent and consistent method that will help in comparing financial performance.

Companies that hire professional outsourced bookkeeping firms won’t have to worry about GAAP compliance. These expert professionals will record the expenses in compliance with the accounting rules. In this blog post, you will learn about the importance of complying with GAAP when recording transactions and preparing reports.

An Overview of GAAP: What Every Business Owner Must Know?

GAAP are guidelines created for accounting professionals in the US for financial reporting purposes. The accounting standards were first published in the 1970s. These accounting guidelines were created by the joint efforts of the Governmental Accounting Standards Board (GASB) and the Financial Accounting Standards Boards (FASB).

The aim of the GAAP is to make sure that a company’s financial statements are consistent, complete, clear, and comparable. The Securities and Exchange Commission (SEC) requires all US-listed public companies to conform to the standards when preparing financial statements.

All accounting professionals including CPAs, accountants, controllers, bookkeepers, and CFOs must follow the GAAP standards when recording transactions and preparing accounting reports.

Every business that aims to raise capital through going public, mergers and acquisition must conform to GAAP rules from the start. This is recommended as transferring from a non-GAAP to GAAP standards will require a great deal of time, cost, and effort.

Components of GAAP Standards

GAAP standards consist of principles that provide specific guidelines regarding accounting and bookkeeping. Here are ten core principles that form part of the accounting standards.

Consistency

Accounting professionals must select a standard and apply the same every period. Adhering to this accounting principle will help stakeholders of the business in evaluating the company’s performance over time.

Sincerity

Accounting and bookkeeping professionals are also required to adhere to the principles of consistency. They must make sure that the accounting records project an accurate and unbiased view of the company.

Non-Compensation

All accounting information needs to be disclosed whether it projects a positive or negative image of the company. As per this principles, accountants must full disclose all financial information with no exception. The accountants should not compensate or offset a liability by using an asset to mislead others regarding the true financial position of the company.

Permanence of Methods

The GAAP rule of permanence is an extension of the principle of consistency. Accountants must make sure that the accounting practices are uniformly applied in recording and reporting transactions. This is necessary to help stakeholders in comparing the performance of a company’s financial performance.

Prudence

Accountants are required to present all financial information without any bias. They must be objective in recording financial performance without any hint of speculation. The principles discourage accountants from presenting speculative data that does not reflect the actual financial position of the company.

Periodicity

Accountants must also adhere to the accounting principle of periodicity. The financial reports must be published in a regular period – monthly, quarterly, or annually. This principle discourages companies from not publishing financial reports during adverse financial situations.

Continuity

The principle of continuity dictates that the assets must be valued based on the assumption that the company will continue to operate normally. The assets should not be based on speculative assumptions regarding specific situations.

Materiality

As per the principle of materiality, a company is required to make sure to disclose all material information. It is important to disclose all financial information that have a positive or negative impact on the financial position of the company

Regularity

Accountants must apply all established principles set forth by GAAP. They should not cherry pick certain principles and ignore others.

Good Faith

Accounting professionals are required to act in good faith and honestly report the financial transactions. They should not window dress the accounts for personal or company benefit.

Importance of Adhering to GAAP Standards

Companies must conform to the GAAP standards to reflect a complete picture of the financial position. Following the principles will ensure that the financial records accurately depict the financial performance of the company.

Following the GAAP standards allows consistency of accounting reporting. This allows business owners, investors, creditors and other stakeholders to accurately evaluate the financial performance of the company.

Complying with GAAP standards will help in raising capital through external sources. It will provide reassurance to the investors and creditors that the company’s financial statements are accurate and transparent.

Every publicly traded company must prepare bookkeeping and accounting records in conformance to the GAAP rules. SEC also requires yearly audits to the financial records of public companies to ensure that it conforms with the standards.

Conclusion

Companies can benefit by complying with the GAAP standards when preparing accounting statements. The financial information and records will be accurate and consistent. It will ensure that the financial records accurately reflect the true financial state of the company.

Financial statements that comply with GAAP rules can be compared and evaluated to determine the financial position and performance of a company. It is important to adhere to the accounting standards to gain trust of the stakeholders.

While complying with the GAAP rules does not guarantee that the financial statements are free of errors, it does lead to a clear, comparable, and correct projection of the financial position of the company.

Maxim Liberty is a competent outsource bookkeeping provider in the US. We have highly experienced and qualified accountants who can handle all your bookkeeping tasks. You can rest assured that all the expenses and income are recorded in compliance with the generally accepted accounting principles. Get in touch with us today by dialing (703) 957-6938.

How Companies Can Benefit from Innovative Accounting Technologies? – (maximliberty.com)

Maxim Liberty is a leading bookkeeping company with over 10 years of experience helping small businesses manage their finances. Passionate about making bookkeeping simple and stress-free, we share practical tips and insights.