Are you familiar with the Generally Accepted Accounting Principles (GAAP)? Most business owners have at least heard of this term, but few knew its true meaning. Whether you run a small, medium or large business, though, it’s important to familiarize yourself with GAAP. Doing so will help you create cleaner records of your business’s financial transaction while subsequently driving your business’s future growth and success.
GAAP refers to a set of accounting standards used by businesses, nonprofits, government institutions and other organizations. They were created by the Financial Accounting Standards Board (FASB) as well as the Governmental Accounting Standards Board (GASB) for the purpose of standardizing financial accounting.
The purpose of GAAP is to assist businesses and other organizations with their accounting activities. Rather than using their own custom-made accounting processes, for example, businesses can use the processes defined in GAAP.
What Are GAAP Principles?
While GAAP covers a wide range of topics associated with financial accounting, it focuses primarily on accounting principles. The principle of consistency, for example, states that business owners and accountants should use the same methods for their accounting activities. In other words, you shouldn’t use different methods of accounting for the same process. The principle of consistency requires you to use the same method.
The principle of non-compensation, on the other hand, states that positive and negative transactions should be recorded. Whether it’s a credit or debit, all transactions should be recorded in your business’s general ledger. Other common GAAP principles include the principle of continuity, the principle of periodicity, the principle of sincerity and the principle of prudence.
Benefits of Using GAAP
There’s no rule, written or unwritten, stating that you must use GAAP for your business’s financial accounting activities. With that said, following the GAAP principles is beneficial for several reasons. First and foremost, it allows for faster and more efficient accounting. After all, GAAP principles were developed by some of the leading accounting institutions, so it’s safe to assume they are effective.
Second, GAAP allows for greater transparency to ensure that no financial transaction goes unnoticed. As a business owner, you probably know the importance of recording each and every transaction. Mistakes are bound to happen, though. If you don’t use GAAP, you could miss a critical transaction that ultimately costs your business money.
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