US GAAP

US GAAP

Understanding US GAAP

GAAP (Generally Accepted Accounting Principles) are basically a set of rules that comprise of the details, legalities and intricacies of corporate accounting. The Financial Accounting Standards Board (FASB) uses GAAP as the foundation for its extensive set of approved accounting methods and practices. Both publicly traded and privately-held corporations in the US can utilize GAAP as part of their company’s accounting system. U.S. law requires businesses that release financial statements to the public and corporations that are publicly traded on stock exchanges and indices to follow GAAP guidelines. GAAP incorporates key concepts, including principles of regularity, sincerity, continuity, utmost good faith, and prudence.

 

US GAAP Foundation

GAAP is fundamentally built on three rules that eliminate deceptive accounting and financial reporting practices. These rules are meant to create consistent accounting and reporting standards, which provide existing and potential investors with reliable methods of evaluating a corporation’s financial standing. Without these rules, there is a risk of accountants utilizing misleading methods to paint a deceptive picture of an organization’s financial standing. These three rules are as follows:

  1. Basic accounting principles and guidelines: A set of 10 guidelines that segregate a business’s transactions from the owners’ personal transactions, standardize currency units used in financial reports, and clearly disclose the time periods covered by specific reports.

  2. Rules and standards issued by the FASB and its predecessor, the Accounting Principles Board (APB): The FASB issues an officially endorsed, up-to-date compilation of principles known as the FASB Accounting Standards Codification, which includes the best- practice standards that have been previously established by the APB.

  3. Generally accepted industry practices: There is no universal GAAP model followed by all organizations across every industry. Rather, particular businesses follow industry-specific best practices designed to reflect the nuances and complexities of different areas of business.

 

Importance of US GAAP

GAAP compliance makes the entire financial reporting process transparent and standardizes assumptions, terminology, definitions, and methodologies. As a result, external parties can easily compare financial statements issued by GAAP-compliant entities and safely assume consistency, which in turn allows for quick and accurate cross-company comparisons. Because of the transparency and continuity provided by GAAP standards, investors and stakeholders can make sound, evidence-based decisions. Further, GAAP compliance consistency enables organizations to evaluate strategic business options with more ease.

 

Benefits of US GAAP for International Accountants

There are several benefits that international accountants can reap from taking the GAAP certification. To mention a few of these:

  1. In the words of Rama Ramamurthy, CPA, a teaching professor at Georgetown University and an IFRS specialist, “IFRS is being adopted by some of the largest countries in the world. If you want to have relevance across international borders, you should have knowledge of IFRS. Business does not begin and end in your country.”

  2. For all companies that plan on one day issuing stocks or participate in mergers and acquisitions, sound knowledge of GAAP is critical. Non-profit organizations as well as local and state governments adhere to GAAP as this provides interested donors and citizens with a picture of how their money is being managed and spent.

  3. GAAP standards aid creditors and investors make accurate comparisons between companies, as companies are expected to follow the GAAP when reporting financial information.

  4. Both publicly traded and privately-held corporations in the US can utilize GAAP as part of their company’s accounting system.

  5. US accounting corporations are engaged in business with multinational clients these days. They have overseas subsidiaries and vice versa. Since the responsibility of GAAP generally falls on accounting professionals, it is a big advantage for international accountants to be familiar with GAAP and how to apply them accurately to secure careers in the U.S.

 

To conclude, GAAP methodology provides a more accurate picture of a company’s revenue and aids accountants in identifying and predicting cash flow trends over time. Accountants can gather information required to diagnose gaps in earning abilities, collection problems, and financial mistakes that need to be corrected. Using GAAP, accountants can compare a company’s overall performance against its competitors and pinpoint where changes are needed. Corporations using GAAP must calculate and report their finances using unbiased evidence. Hence, accountants can determine the benefits of different financial decisions based on companies in their client’s industry or those with similar business models.

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