generally accepted accounting principles

generally accepted accounting principles

Importance of Generally Accepted Accounting Principles

1. Introduction to Generally Accepted Accounting Principles

Officials who are responsible for the organization’s financial reporting are the driving force for an organization to continually maintain the representation of financial information of accountants. Whether they are accountants obtaining their expertise in a variety of different industries or exposure with their careers, which has provided them with insight into the different roles of accounting reports, these individuals understand the importance of financial information representation.

Users who make decisions involving an entity closely depend on this consistency in the representation of financial information. Applying a multitude of financial reporting methods would not serve the purpose of enabling users to make meaningful comparisons. Throughout the period that these users are relying upon, the information presented should reasonably connect on a particular basis. This basis is referred to as the accounting principles.

When analyzing the outside users of financial information, you will note that the balance in financial statements represents future expectations. In order for the users to make decisions concerning the entity, such as investing, providing credit to, holding, or conducting transactions, these financial statements must connect to the statement of the user’s opportunities expectations. The financial information provided for an organization aligns on a substantial foundation known as GAAP, an abbreviation for “generally accepted accounting principles.”

In the business world, all organizations are judged by the general acceptance of others. If an organization is unable to gain or keep the acceptance of the general public, that company will have a hard time achieving and maintaining a successful pathway in its industry. These others consist of an entity’s customers, suppliers, employees, creditors, debt providers, investment community, governmental bodies, and the general public.

2. Benefits of Following Generally Accepted Accounting Principles

Adhering to GAAP instead of another set of accounting standards allows for better comprehension of the financial data in the statements because investors and creditors know that the accounting standards are designed to be similar. When companies use accounting principles other than GAAP, investors and creditors are at a disadvantage because the company’s books may be prepared with accounting standards that differ from standard practices. By using GAAP, the real earnings of a company become apparent when compared to other companies. Because the standards are designed to be roughly similar, investors and creditors can compare companies’ financial information rather than spending their time adjusting figures. Evasive measures taken by management for its specific accounting choices are limited when GAAP has been adopted. Because other companies use the same standards, investors, employees, and creditors are aware of the normality of the accounting rules and are less likely to be misled.

Company management and financial information users need accurate financial reports to make sound decisions. Generally Accepted Accounting Principles (GAAP) is an accounting standard adopted by the U.S. Securities and Exchange Commission (SEC) that companies in the United States must follow when they compile their financial statements. Support for the notion of following GAAP is widespread, and the American Institute of Certified Public Accountants, the Financial Accounting Standards Board, and the Securities and Exchange Commission all want companies to adopt these standards. The general acceptance and standard for these accounting principles has been settled due to the assumption that no accounting policy can be accepted because it is controversial, or because individuals consider it reasonable, or because the timing of decision making needs to be resolved.

3. Key Components of Generally Accepted Accounting Principles

The professional accounting board, the Financial Accounting Standards Board (FASB), sets standards for financial reporting in the United States. The Securities and Exchange Commission (SEC) has the legal authority to decide whether to accept the FASB’s changes to U.S. accounting standards. Should the SEC choose not to send back a proposed standard for further consideration, external organizations, such as the International Accounting Standards Board (IASB), can influence the development of new accounting standards, since the SEC has expressed in the past an eagerness for the FASB to work with these external bodies in creating international standards that converge with GAAP. Nonetheless, the FASB sets the standards that are the most highly regarded as acceptable accounting principles in the interest of promoting financial reporting to the public that fosters trust and confidence.

According to the American Institute of Certified Public Accountants, Generally Accepted Accounting Principles, or GAAP, are a combination of authoritative standards (set by policy boards) and the commonly accepted ways of reporting the organization’s activities. These principles and standards are critical to your business. Whether you’re seeking funding through a bank loan or an investment firm, or even if you intend to sell the company or merge with another entity, you can be sure any potential buyers or investors will closely examine your operations and financial records. They want to know that your company is conducting business in a fashion acceptable to the rest of your industry, and if necessary, they can determine the value and financial state of your business transactions.

4. Challenges in Implementing Generally Accepted Accounting Principles

So, to answer those questions, we first turn to the awareness that GAAP targets professional accountants who, even for those not employed at CPA firms, interact with publicly-traded companies on many different levels. After stating that understanding GAAP is important regardless of your own professor’s position on that matter, Myers and Skinner explore the full-block requirement within numerous research studies and, after doing so, assert that “This strongly suggests a careful review and analysis in accounting.” Here, we expand on this teaching by demystifying the complexities of GAAP into three simple concepts that help students recognize how and why FASB has such a dramatic, overall impact. As we have used these three steps in our own teaching, we have found that this approach dramatically empowers students in learning every accounting course that follows our introduction to financial accounting.

Why does GAAP have such a large impact on financial reporting in the United States? Why are those standards referred to as “Generally Accepted” instead of as “Inviolate Principles”? Stated differently, how does the slow-moving FASB create broad-based voluntary compliance with hundreds of complex accounting rules and do so without having any direct authority over the vast majority of US businesses? Although FASB shares authority over publicly traded firms with the SEC, the equity markets and accounting support organizations are the ones that actually create overall GAAP compliance.

5. Conclusion and the Future of Generally Accepted Accounting Principles

The reasoning is as follows. It will take several years of time for the public to be convinced that the current guidelines for financial business decisions are to be found in GAAP and SAP. It is because of this that for a sustained amount of time, all of the new entrants into the business decision-making community will continually need to be re-convinced that GAAP and SAP are the way to follow. Knowable practitioners should be easily convinced since, after all, that is what really matters when implementing GAAP. The mass of the public, however, will only be convinced by a slow process between financial decision-makers. Specifically, influential educational changes need to be made and carried on for years before there will be consensus in the United States about how to make financial business decisions. It will take several years for these educators to incorporate considerations about financial statements and financial management into other classes that business students are taking.

This paper provides support for generally accepted accounting principles (GAAP) and statutory accounting principles (SAP). Indeed, completions like this may show the public that further thought is being put into the answer to the question “can we trust GAAP?” by the accounting profession. The major conclusion that can be drawn from this paper is that the accounting profession should only look to GAAP and SAP to provide a basis for making financial business decisions. While the practical applications that have resulted from the knowledge of GAAP may be useful to a practitioner and not a business decision maker, knowledgeable use of GAAP is what is useful in business. As long as active market prices are observed, one should not invest in an instrument where the statements created under any system of GAAP do not reflect the underlying asset values. The public and the profession are bound by this conclusion. However, serious changes in the structure of accounting education need to be made during the next several years in order for these conclusions to be widely accepted by the United States accounting profession. Should these recommendations about accounting education not be taken, the United States accounting profession will be continually deviated from by the public it serves.