(Generally Accepted Accounting Principles)

John F. Williams

The Opportunity

A year ago, anyone with a reasonably good idea could start a business. It was easy to get a venture capitalist's interest even without knowledge of GAAP and its widespread ramifications. You could usually do pretty well in the stock market without knowing the details of a company's financial profile, or how to compare it with like corporate entities. Today, however, business can be rough on the uninformed.

Starting a business, securing capital, investing in stocks, or even evaluating a marketing plan requires more savvy than it did even six months ago. Money is harder to come by, and more stringently controlled. Whether you're a project manager, department manager, a business owner, or an investor, it is now more important than ever to know the basics of accounting, including GAAP- (Generally Accepted Accounting Principles.)

The United States and Japan use GAAP (and very soon most of Europe) for financial reporting and in some cases government reporting as well. It's becoming more widespread in other areas of the world as well.

Japan had its own GAAP, but is in the process of adopting the US version, because it (US) is more stringent and in wider international use.

The Solution

Those with a passing familiarity with accounting know that managers have choices about the way their organizations report income and financial condition. For example, LIFO and FIFO can lead to different net income. With such an array of methods and practices available, what is the meaning of "generally accepted accounting principles"?

Accounting principles are developed methods, practices and conventions used by managers and accountants to prepare financial reports. Generally accepted accounting principles evolve when these methods become widely used. However, there are many widely used accounting principles for presenting classifications of financial information. It is a challenge then to make correct conclusions and judgements based upon the diversity of "generally accepted accounting principles".

Customized GAAPs

As we know, in life there are choices because not everyone's life is the same. Companies of the same industry by choice therefore, tend to create their own GAAP. This concept allows readers of the same industry to compare financial information. This assumes that financial managers are trying to make the playing field "fair" to the uneducated reader. There in lies the problem. You cannot take a complicated subject and explain it to an uneducated reader. So why is it expected?

GAAP Evolution

Generally Accepted Accounting Principles have varied over time. While originally these were the policies and procedures used in practice, they now refer to the larger body of guidelines for accounting that exist. This larger body refers to the variety of professional and governmental organizations and standard setting bodies that exist such as the APB, FASB, older items from the AICPA "Research Bulletins" and APB Opinions. Add to this Gov't standards from the GASB and FASAB.

These standards represent the large variety of financial interests that exist in the world and the variety of special representations needed to accurately and fairly represent their financial position(s).

Conclusion

Generally Accepted Accounting Principles (GAAP), are merely common methods of measuring and reporting financial data. More specifically, they are a methodology of observing, measuring and reporting the financial data of an entity to those that may be interested such as investors, creditors, or regulatory authorities. The principles are developed from widely used or recognized practices in reporting financial information.

 

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