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Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles (GAAP) Definition

Generally Accepted Accounting Principles (GAAP) are a set of standards, guidelines, and regulations for financial accounting. Companies should follow GAAP rules when preparing financial statements.

GAAP rules were established to provide consistency in financial reporting and accounting practices. The rules evolve over time. Therefore, they reflect the most relevant and applicable accounting practices.

GAAP Meaning

Generally Accepted Accounting Principles (GAAP), in short, means the rules which provide the basis of all accounting decisions for financial institutions, businesses, and organizations. In the U.S., several organizations influence what GAAP rules, including the Financial Accounting Standards Board (FASB), the American Institute of Certified Public Accountants (AICPA), the Securities and Exchange Commission (SEC), and the Internal Revenue Service (IRS). U.S. GAAP differs from other international accounting standards, but organizations like FASB and the International Accounting Standards Board (IASB) are working to establish acceptable international accounting standards.

Overall, accountants calculate in two ways: for a financially stable or financially instable company. This is referred to as the Going Concern; unstable companies calculate assets by estimated value of the item when liquidated.

GAAP Standards

Generally Accepted Accounting Principles (GAAP) uses many standards and protective measures to ensure reliable and useful accounting statements. For example, accounting is done in fiscal periods which may not coincide with actual calendar periods. They instead coincide with the relevant events that happen to the company with respect to accounting standards.

Worst Case Scenario

Many GAAP standards account for the worst-case scenario. When you record past events in their value at the given time, call this the historical monetary unit. Additionally, subtractions from company cash are made when possible whereas additions are made only when the product is sent and cash is received.

Do Not Consider Intangibles

Under GAAP, do not consider intangible values, such as workforce knowledge or brand goodwill, an asset. Do not record these in the balance sheet. Furthermore, always make an effort towards consistency. Expectations like depreciation or inventory are accounted for in the same way across all periods which they occur. You must make any changes to one period, under this concept, to all periods past. Also, make these changes completely clear to the reader of the statement, providing the necessary background to understand the true meaning of the document.

Lastly, the scope of the company comes into play. An example of this would be a laptop computer: the accidental destruction of a single laptop means much more to a small business than a multinational one. The company scope is essential to relevant and readable financials.

GAAP Example

For example, Natalie is the CFO at a large, multinational corporation. Her work, hard and crucial, effects the decisions of the entire company. She must use Generally Accepted Accounting Principles (GAAP) to reflect company accounts very carefully to ensure the success of her employer.

Natalie begins her process of creating GAAP compliant statements. First, she looks at past records. These provide the crucial understanding of where her company has been. From here she can expand her accounting to meet the current and future needs of the company.

Nataile makes sure to to keep statements consistent. With the recent change in company policy from LIFO to FIFO, she has a lot of work ahead to correct past balances as well as make the change clear in the body text of the document.

When Natalie creates financials she ignores the value of the company name and brand, despite the fact that they sell a product which is in many ways a commodity. Her concern is tangible rather than intangible assets.

Bad News

Finally, the executive salesperson enters her office with the bad news that he has been in a car accident with the company car. The accident destroyed the vehicle beyond repair. Though Natalie is concerned for the health of her co-worker she is not concerned with the value of the vehicle: with a vehicle fleet valued at over $25 million a single car is not the concern of Natalie.

Natalie finally completes her assignment. She has faith in her work due to her training and expertise in her field. She has confidence that she has prepared sound GAAP complaint statements.

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generally accepted accounting principles (gaap)

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generally accepted accounting principles (gaap)

See Also:
Accrual Based Accounting
Modified Accelerated Cost Recovery System MACRS
10 Q
Asset
History of Accounting
Full Disclosure Principle

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Statement of Financial Accounting Standards (SFAS)

The Statement of Financial Accounting Standards (SFAS) describes standards for professional accounting practices and procedures in the United States. Furthermore, it is published by the Financial Accounting Standards Board (FASB). The document lists standard rules and regulations – including many from GAAP – for preparing financial statements. In addition, the FASB intended for these standards to promote uniformity and transparency of corporate accounting practices. In conclusion, all publicly traded companies in the United States must adhere to the rules and regulations described in Statement of Financial Accounting Standards (SFAS).

Statement of Financial Accounting Standards (SFAS) Online

If you want to see the Statement of Financial Accounting Standards, then go to: fasb.org

When accounting standards change, they have the opportunity to change how your company accounts – resulting in disruptions. If you want to overcome obstacles and prepare how your company is going to react to external factors, then download your free External Analysis whitepaper.

Statement of Financial Accounting Standards

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Statement of Financial Accounting Standards

See Also:
Accrual Based Accounting
Accounting Income vs Economic Income
Chart of Accounts (COA)
The Future of the Accounting Workforce
Accounting for Factored Receivables

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History of Accounting

History of Accounting

Below is the history of accounting timeline is a general overview of larger events which have all contributed to modern day accounting. It encompasses primitive accounting, with the use of an abacus, to the accounting software and regulation that we use today.

History of Accounting Timeline

The history of accounting timeline starts in 2500 B.C.

2500 B.C.

Historical accounting records have been found in ancient civilizations like the Egyptian, Roman, and Greek Empires as well as ancient Arabia. Back then, rulers kept accounting records for taxing and spending on public works.

1000 B.C.

The Phoenicians created an alphabet with accounting so that they were not cheated through trades with ancient Egyptians.

500 B.C.

Egyptians carried on with accounting records. They even invented the first bead and wire abacus.

423 B.C.

The auditing profession was born to double check storehouses as to what came in and out the door. The reports accountants took were given orally, hence the name “auditor.”

1200 – 1493

The first requirement for businesses to keep accounting records spread across many of the Italian Republics in the 13th century. They took these records mainly to keep track of the day to day transactions and credit accounts with other businesses.

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1494

Luca Pacioli, the father of accounting, writes his famous paper “Everything about Arithmetic, Geometry, and Proportion.” The treatise that he writes is mainly a study that Pacioli performs on the common practices of merchants in Venice, Florence, and Milan. He revealed that several merchants kept books of debits which means “he owes” as well as credits which means “he trusts.” With this early double entry accounting system merchants were able to maintain records so that they could improve the efficiency of their businesses. With these records came the primitive income and balance sheet statements.

1500 – 1700

As the time progressed, double entry records had large and small innovations added. For example, the East India Company develops invested capital and dividend distribution during the 17th century. This also created the need for a change in financial accounting and managerial accounting. They used the first presentation to gain investors, while they used the next presentation for business efficiencies.

1700 – 1900

During the Industrial Revolution, accounting really took off as industrial companies sought out to gain financing and maintain efficiency through operations. Several of the double entry accounting methods was truly developed in this area as there was a focus on business as never before. Shortly after, the first accounting organization was developed in New York in the year 1887. The title and professional license of the Certified Public Accountant followed shortly in the year 1896.

1920 – 1940

The 20s accounting really became important to reduce the amount of fraud and scandals that were performed in businesses around the country. U.S. GAAP was developed shortly after by the American Institute of Certified Public Accountants (AICPA) and the Financial Accounting Standards Board (FASB) in the year 1939.

1940 – Present

Since this time the AICPA and FASB have been working together with the Securities Exchange Commission (SEC) to develop accounting standards for business. Through the help of technology and computer systems all standards created for U.S. GAAP have been centrally located into what is known as the “codification.” The codification reveals all of the current practices and standards, and even reveals developing areas of standards of accounting that are currently being debated upon.

Several accounting systems like Peachtree and Quickbooks have also made the accounting profession automated. These programs ease the reporting of transactions, but also comply with GAAP. Because of this there is a lesser need for accountants to post transactions, and more of a need for the review of these transactions. In some firms, they don’t realize the change as they still employ a full accounting staff. As time moves forward it is necessary for accountants to move into a role of reviewing transactions rather than posting them.

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history of accounting

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history of accounting

See Also:
History of Factoring
Generally Accepted Accounting Principles (GAAP)
International Financial Reporting Standards (IFRS)
Financial Accounting Standards Board (FASB)
Certified Public Accountant (CPA)

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Research and Development

Research and Development Definition

Research and development (R&D) in business refers to activities geared towards new product development or current product improvement. It typically involves conceptualizing and designing new products and then tailoring them to meet the needs of the target market. R&D is often a line item on a company’s income statement. Technology and pharmaceutical companies often have comparatively high research and development spending because these industries are very research-intensive. Substantive spending on R&D can also be a sign that a company is growing or expanding.

Accounting Research and Development

In accounting, there is some controversy over whether research and development spending should be considered an asset with future benefits for the company or whether it should be expensed in the period when it is incurred. Some claim that because R&D is part of the process of creating new products, it should be considered an asset with future benefits to the firm and expensed when the new products are eventually sold. Others claim that research and development is a regular operating expense, and it should be expensed in the period in which it is incurred.

In the U.S., the Financial Accounting Standards Board (FASB) solved the dilemma by requiring all companies to expense R&D in the period incurred. This is the rule according to GAAP.

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Research and Development

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Research and Development

See Also:

How to Estimate Expenses for an Annual Budget
Capital Budgeting Methods

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Financial Accounting Standards Board (FASB)

Financial Accounting Standards Board (FASB)

The Financial Accounting Standards Board (FASB) is the organization that is responsible for both establishing and interpreting the standards of financial accounting and reporting practices in the U.S.

One may know the standards as Generally Accepted Accounting Principles (GAAP). These principles are designed to provide uniformity and credibility in the realm of corporate accounting. In addition, GAAP provides rules and guidelines for the preparation of financial statements.

FASB is not a government entity, but instead, it is an independent organization founded in 1973. In addition, its headquarters are in Norwalk, Connecticut. The Securities and Exchange Commission (SEC) recognizes FASB standards as authoritative.

FASB Website

If you want more information, then go to: www.fasb.org.

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financial accounting standards board

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financial accounting standards board

See Also:
International Financial Reporting Standards
Financial Ratios
Financial Instruments
Finance Derivatives
Finance Beta Definition
FASB Lease Accounting Changes

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FASB Lease Accounting Changes

See Also:
Capital Lease Agreement
Lease Agreements

FASB Lease Accounting Changes

A change in accounting rules implemented by The Financial Accounting Standards Board (FASB) has led to FASB lease accounting changes. Furthermore, the proposed lease accounting changes will bring a large amount of debt onto the balance sheets of companies that have large operating lease commitments. Going forward, the lease commitment will be recognized as a liability. In addition, the offsetting asset will be a right-to-use for the material being leased.

FASB Lease Accounting Rules

An example of an operating lease would be where a company rents office space. Under the new FASB lease accounting changes, the future lease payment obligations will be on the balance sheet as a liability. The offsetting asset will be an equivalent “right-to-use” entry.

At the end of the contract, the capital lease has an option to purchase the leased asset. In accordance with the new FASB lease accounting rule, the capitalized lease is already required to be carried on a company’s balance sheet as a debt to lease holder and an asset entry for the item being leased. This ruling in effect makes all leases capital leases.

Effective date

The effect of the FASB proposal on lease accounting could be enormous on industries that have large exposure to operating leases, such as real estate companies, etc. Also, a possible effect of the FASB lease accounting proposal would be where companies have to recognize leases on their balance sheet. That changes some loan covenants for debt ratios, etc. The changes became effective after the FASB decision in March 2011.

FASB lease accounting changes

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American Institute of Certified Public Accountants – AICPA

American Institute of Certified Public Accountants (AICPA) Definition

The American Institute of Certified Public Accountants (AICPA) is a professional organization for Certified Public Accountants (CPAs). Furthermore, this organization is based in the United States. The organization dates back to 1887.

The AICPA creates the CPA examination. Then, they grade the CPA examination. In addition, it is also the organization that authored many of the original financial accounting and reporting standards included in GAAP; however, FASB is now responsible for GAAP.

The AICPA’s primary objectives include the following:

  • Advocacy on behalf of members
  • Certification and licensing of new members
  • Promoting public awareness of CPA professionalism
  • Recruiting and educating prospective CPAs
  • Establishing professional standards

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american institute of certified public accountants

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american institute of certified public accountants

AICPA Website

If you want more information on the AICPA, then go to: AICPA.org.

See Also:
Statement of Financial Accounting Standards – SFAS
Sensitivity Analysis Definition
Standard Chart of Accounts
Problems in Chart of Accounts Design
Future of the Accounting Workforce

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