You’ve probably seen the term GAAP accounting recently. It was
mentioned in many of the stories about this year’s corporate
financial scandals.
Or if you’re a business owner, your bank or investors may have
asked you for GAAP financial statements. But what exactly is GAAP
accounting?
You’ve probably seen the term GAAP accounting recently. It was mentioned in many of the stories about this year’s corporate financial scandals.
Or if you’re a business owner, your bank or investors may have asked you for GAAP financial statements. But what exactly is GAAP accounting?
GAAP stands for generally accepted accounting principles. It refers to the standard set of accounting rules and principles accountants use to record transactions and prepare financial statements for outside users. The purpose is standardization.
When banks, creditors, investors or others look at your financial statements, they want to have confidence in them.
There are many ways to account for financial transactions.
If users know they’re looking at a GAAP financial statement, they understand how it was prepared. When CPAs audit your financial statements, they’ll generally certify whether they comply with GAAP.
If you wish to list your company’s stock on a U.S. stock exchange, you’ll need to produce GAAP-based financial statements.
Who decides what’s GAAP?
The principal rules come from an independent body called the Financial Accounting Standards Board. The American Institute of CPAs and other bodies also help to define acceptable accounting practices.
GAAP is used to produce uniform financial statements for outside users. But it’s not the only basis of accounting.
For example, your tax returns probably don’t conform to GAAP. Tax accounting uses a different set of rules, defined in the IRS Code.
If you prepare personal financial statements, they may not always comply with GAAP, and many companies use non-GAAP accounting for internal management reports.
Different countries even have their own versions of GAAP.
But if you’re doing business in the United States, GAAP accounting is the gold standard.
Kerry Lorincz is a certified public accountant and a partner with the accounting and business consulting firm of Bianchi, Lorincz & Company, located in downtown Hollister. For more information,
call 638-2111.
