What is the Function of GAAP? about:reader?url=https://bizfluent.com/about-...

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What is the Function of GAAP?

3-4 minutes

Though some of the rules of accounting may seem like

common sense, it's a good idea to have them formalized and
written down anyway. Others are very technical and not at all
intuitive to the layman accountant. In the United States, the
Generally Accepted Accounting Principles, or GAAP, are
created by a privated company called the Financial Accounting
Standards Board (FASB), which has been delegated this
responsibility by the Securities and Exchange Commission.

Features

GAAP is the set of standard procedures for recording business

transactions and reporting balance sheet entries. The features
of GAAP include standards for how to calculate revenue, how
to classify items on a balance sheet, and how to calculate
outstanding share measurements.

Significance

The standards incorporated into GAAP provide general

uniformity in figures that are in turn used to calculate
important financial ratios that investors and analysts use to
evaluate the company. Even compliant balance sheets can be
challenging to decipher, but without a system defining each
category of entry, corporate financial statements would be
virtually opaque and worthless.

Identification

There are seven main principles that guide the establishment

of the Generally Accepted Accounting Principles. The

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principles of regularity, consistency, permanence and sincerity

go towards the encouraging companies to use the same lawful
accounting practices quarter after quarter in a good faith effort
to show the true financial condition of the company. Non-
compensation, prudence and continuity establish guidelines
for how to prepare a balance sheet, generally to report the
financial status of the company as it is without treating assets
in unorthodox ways that misrepresent the operations of the
company just to offset other entries. The principle of
periodicity simple means that income to be received overtime
should be recorded as it is scheduled to be received, not in a
lump sum up front.

Function

The unified system of accounting therefore has numerous

benefits. Not only does it provide a certain level of
transparency into a company's finances, it also makes for
relatively easy comparisons between businesses. As a result,
GAAP encourages investment by helping investors choose
wisely. GAAP gives America companies an advantage over
foreign ones where investors, unless they have an intimate
understanding of the business, might have much more
difficulty calculating the potential risks and rewards of an
investment.

Considerations

GAAP applies to U.S.-based corporations only, though every

other major country has accounting standards in place for their
domestic businesses. In some cases, foreign accounting is
fairly similar to U.S. GAAP, varying in only minor and easily
accounted for ways. In other cases, the standards vary
significantly making direct comparisons dubious at best.

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