Like many professions, accounting has established principles to standardize its conduct despite jurisdiction. These rules help ensure consistency in concepts and procedures. The Generally Accepted Accounting Principles ( GAAP) are these standards. They apply only to financial reporting in the United States.
Efforts are being made to establish an International Financial Reporting Standards due to the ever-increasing global economy we find ourselves in. Companies the world over following similar accounting principles would enable more accurate comparisons of world-wide financial statements.
The Financial Accounting Standards Board
A board known as the Financial Accounting Standards Board (FASB) sets the accounting standards for the GAAP. It is comprised of business people, financial executives, practicing accountants, and accounting academicians. GAAP have accumulated and evolved over time. Several bodies, including the American Institute of Certified Public Accountants, the SEC, the American Accounting Association give input to the FASB.
The principles set forth by the FASB come from traditional accounting procedures. A lot of the procedures are ethical in nature. For example, the “principle of sincerity” establishes that those tracking a company’s finances will do so honestly, giving a true portrayal of the company’s financial status.
The GAAP is the guide for preparing financial statements for review by outside entities. Currently there are more than 150 “pronouncements” as to how to account for different types of business transactions. GAAP are not static. Changes in the rules have a potentially huge impact on American businesses. The study of accounting involves learning the GAAP and mastering how to apply them to actual business transactions.
In addition to the GAAP, the IRS provides accounting principles and procedures for handling taxation. Being well-versed in these can assist in providing the appropriate financial information required come tax time.