13 Best Practices that Can Help Businesses in Attaining GAAP Compliance
The set of rules, guidelines and principles set by the Financial Accounting Standards Board of the US and the American Institute of Certified Public Accountants (AICPA) on how a company should adhere to, irrespective of its size or industry niche are termed as Generally Accepted Accounting Principles (GAAP). These can be used by businesses to organize and summarize financial information into accounting records and financial statements. GAAP principles help publically traded companies for developing financial statements against comprehensive, complex, and legalistic accounting rules. Covering a broad array of topics such as financial statement presentation, liabilities, assets, equities, revenue and expenses, business combinations, foreign currency, derivatives and hedging, and non-monetary transactions, GAAP facilitates comparisons.
This article is aimed at acknowledging readers on how small, medium, and large scale businesses for analyzing and extracting information over some time. Mitigating accounting fraud, these approaches will also maximize transparency, allowing the identification of any red flags. OURS GLOBAL’s Financial and Accounting Services helps businesses through GAAP compliance, our specialized expertise will attend to business requirements and position your business with confidence in the view of investors and lenders.
Following are Principles that Can Help Businesses in Attaining GAAP Compliance:
As a combination of practices with authoritative standards, listed below are commonly accepted approaches of recording and reporting accounting information for the improvement of clarity, consistency, and comparability of financial information.
1.Principle of Regularity
The principle of regularity helps large business systems for managing them amidst regularities. By establishing a wide range of regularities appropriate for a business, they can ensure efficiency across self-management efforts for distributed systems. The principles help accountants adhere to GAAP rules and regulations as a standardized approach.
2.Principle of Consistency
Businesses are required to continue adopting the same accounting principles or methods consistently that they have used from their initial phase so that the results reported throughout each phase to another are comparable. All changes over accounting principles for improving the usefulness of the reported financial results. Accountants are required to fully disclose and explain the reasons behind such updations along with the footnotes on financial statements.
3.Principle of Sincerity
Every business will have the responsibility for accurate and impartial representation of the company’s financial situation. Fairly and accurate analysis and representation of financial information
4.Principle of Permanence of Methods
Businesses must incorporate consistent procedures for enhancing the ability to be consistent decisions for a much more accurate comparison of the company’s financial information. While reporting both positives and negatives, businesses can avoid the troubles of speculation over fact-based financial data.
5.Principle of Non-Compensation
Businesses must include both positive and negative events in their financial reports with no prospect for debt compensation. No practices should be aimed at compensating a debt with an asset, revenue with an expense, etc.
6.Principle of Continuity
Businesses must value assets under the assumption that they will continue their operations. The criticality of the continuity assumption becomes most clear when considering the ramifications of assumptions over the continuity of the business. In event of disparities, businesses must value their assets even if they have no resale value. While continuing operations, these can be the assurance that any of the inventories can be sold. Unsold inventories can influence the whole business’s equity value, which should be later noted in the balance sheet.
7.Principle of Periodicity
Representing the business’s complexity and ongoing activities subcategorized as annual, quarterly, and monthly financial statements makes up periodicity. Some businesses require considerable time for the manufacturing activities of their product that can be divided as per the same. Assuming revenues and costs to assigning and allocating appropriate accounting periods will support accountants in reporting their net income and cash flows for the respective accounting period. This approach will help businesses to analyze business’s financial position after each accounting period.
8.Principle of Materiality
The conceptual information of the material items to be reported in their financial statements, materiality value helps businesses in the exclusion or inclusion of items guiding businesses in their decision-making endeavors. Accountants must ensure in their practices for fully disclosing their financial data and accounting information in financial reports.
9.Principle of Utmost Good Faith
Incorporating contracts that state the obligation of all parties to act honestly or avoiding withhold information from one another can be termed as the principle of utmost good faith. Maintaining transparency and general assurance among every transaction, these contracts are subjected to be void and later legal consequences until violation of the same. Making all parties responsible for the maintenance of all relevant information, will also help them during negotiations. In events of provision of goods or services before the information is discovered or disclosed, the misinformed party will have to be subjected to legal actions of recuperation of costs associated with the fulfillment of the contract that became fraudulent.
10.Principle of Cost
The whole amount that a business has must be quantified, measured with proper historical cost preparation. Every amount of value that a business owns such as buildings and others as per the accounting principle must be made visible on the balance sheets along with their costs. No efforts should be made by the accountants in changing the same value for the changes in the fair market value.
11.Principle of Objectivity
All accounting measurements and reports must be compiled from objective, factual and verifiable data. All Accountants, accounting systems, and accounting reports must be driven in the same fashion. Incorporating objective data into accounting operations rather than subjective data helps the compilation of resultants to be much accurate.
12.Principle of Unit-of-measure
The assumption of each business’s domestic currency as the consistent unit of measure in their accounting operations. This guides business accountants in using the respective currency in their accounting information. The proper assumption of unit measure is a stature of implicit, making inflation and deflation variations influence the purchasing power of the unit of measure used in the accounting system.
13.Principles of Separate entity
Stating the business entity to be sole proprietorship as a separate entity, proprietorship much independent from the business owner. Assuming the businesses as a separate entity solves all problems that arise from the partnerships. With the assumption of a separate entity, accounts can enable financial statements for sole proprietorship or partnership. This makes the businesses separate, definable and distinct from stakeholders, owners, and partners.
Following the best practices helps businesses in assembling and reporting their financial information objectively and accurately. Relying on the outsourcing of finance and accounting operations such as OURS GLOBAL’s Finance and Accounting Services helps businesses in freeing your business’s financing information to be free from biases and inconsistencies. Keeping businesses parallel with dest and ideal accounting best practices and standards, we ensure every accounting information to be compliant with GAAP.
