gaap accounting essay

gaap accounting essay

The Importance of GAAP Accounting in Financial Reporting

1. Introduction

It is our belief that the company whose management has a clear perception of the operating goals of financial reporting will not only conduct its affairs in a manner which responds to those goals but also will strive to see to it that the company’s financial statements are auditable. The most common framework for financial reporting is generally accepted accounting principles (GAAP) promulgated by the AICPA. How are those principles developed? What source material is used in their development? For whose protection are those principles promulgated? The professional attitude adopted by the framers of accounting principles is reflected in their first consideration in arriving at solutions to problems, namely, “Who is to use the financial information?” For the protection of the financial statement users, they specify detailed standards on accounting methods, measurements, reconciliations, classifications, and representation. The users are provided with requirements in proper form and content as well as explanatory material, guidelines, and examples serving to improve reporting and to facilitate a proper understanding of financial information.

The successful operation of any business enterprise makes large demands on the time and talents of its owner or management personnel. Moreover, responsibilities to important people other than stockholders – namely, employees, customers, and creditors – are of such significance that a management commitment to the improvement of financial information is an absolute necessity. A vital link to the fulfillment of these responsibilities is the accounting profession. Timely financial reports, particularly those of an early warning nature, provide urgently needed information for improved decision making by lessors, employees, sales prospects, customers, investors, etc.

2. Understanding GAAP Accounting Principles

Financial accounting is subject to financial chart or statement requirements and measures the history and current progress of the entities’ corridors. Its purpose is comprised of financial calendar or business statements and reports that are intended for external entities such as partners, investment companies, government agencies, or regulators, who must comply with general specified requirements from their rules and national regulations from the GAAP. According to the best estimate and the rules agreed upon in the drafting of financial statements, investment resumes and extends its guidelines to the provisions of audit accounts, since accumulated, adjusted, corrected information should be obtained for many phases of accounting.

In order to understand the importance of GAAP accounting in financial reporting, it is important to understand what they are. GAAP is an acronym which stands for Generally Accepted Accounting Principles. It is a set of accounting principles and standards to be followed in the financial documentation and due diligence carried out by accountants and managers of publicly traded and privately held organizations. GAAP accounting standards developed by the FASB and SEC are used for profit-making companies, non-profit entities, and government organizations. It is revised from time to time in order to keep up with the changes in the financial structure to provide companies with clear accounting guidance and rules to ensure that its documents are uniform and meet banking and financing institutions’ requirements.

3. Benefits of Implementing GAAP Accounting

Another critical benefit of nurturing this set of rules is the possibility of measuring and presenting relationships between the income statement, balance sheet, statement of cash flows, and other accounting statements. This allows for a comprehensive understanding of events, activities, and transactions that have economic effects on the financial position of a company. Conformance with accounting standards includes the importance of uniformity, consistency, and understandability, as well as the assumption of conservatism in the absence of rule Fitch and commas principle.

The most important advantage of having accounting standards is that they help to compile and publish consistent financial business information. It makes it easier to compare the performance of companies in a given field, as well as understand the key elements of corporate activities. Clear, complete, and comparable financial information is very useful to interested users in making rational investment, credit, and management decisions. It also helps in exempt standardized reports and contributes to sustainable global economies.

Inadequate accounting standards also cause compliance and reporting costs to increase. This can be due to several forms, such as increased audit fees, which force companies to comply with separate regulations and other requirements. It also includes costs associated with developing and implementing accounting systems consistent with GAAP, as well as the cost of correcting errors and restating financial statements resulting from the application of inappropriate accounting principles and procedures. Misapplying accounting standards can also result in misleading information and increased costs, such as income tax disputes with government authorities, debt covenants with lenders, and damages from security mechanisms.

For example, deferred revenue can be recognized when it is actually earned in transactions over time, provided that the company is expected to complete the transactions so that its obligation to transfer goods or services is no longer at risk. The fees should also be fully refundable and subject to substantive refund rights, and the company should be able to reasonably estimate variable consideration. Revenues subject to these constraints are deferred until the company can demonstrate what events have transpired that ensured its right to payment, along with the amounts of the consideration. These latter two conditions require a company to demonstrate what has transpired before customers’ payments or refunds of those amounts could be recognized as revenue in the financial statements. This includes the company’s experience, which indicates that the likelihood of a significant revenue reversal will not occur, and that the company is able to precisely estimate the consideration.

The benefits of implementing GAAP accounting in financial reporting are numerous. The purpose of generally accepted accounting principles is to provide a framework in which accounting policies can be developed. GAAP helps in determining the appropriate accounting treatment for a variety of transactions and events.

4. Challenges in GAAP Accounting Compliance

It’s important to provide adequate financial reporting of the multiple effects of these transactions, including their measures. It may be a timing concern so that statements of financial position can be submitted on a timely basis. There may also be external pressures involved, like the size of the method or individual or small companies. There may also be independent auditors who may sometimes push companies even beyond what is reasonable in trying to comply with existing accounting standards or GAAP or some particular guidance. Let me also point out, one day most accounting students are going to face this particular challenge. Are the accounting students prepared to deal with this very problematic and complex GAAP accounting problem?

In discussing GAAP accounting compliance, it’s important to remember that the goals of GAAP are to provide the information that is useful to present and potential investors, creditors, and others in making investments. These goals may be kind of easy to meet for larger companies, but what about smaller companies that don’t have the infrastructure to deal with these kinds of often complicated goals? This may include understanding all the technicalities and GAAP pronouncements, as well as the methodologies that are involved, particularly with regard to recognizing revenue, as I briefly discussed a couple of slides ago. That may involve putting proper internal controls in place to ensure all activities and transactions are aligned with GAAP guidance.

5. Conclusion

GAAP accounting is very important for small businesses, larger corporations, nonprofits, governments, and other entities because it provides the basis for investors, owners, and other stakeholders to trust that the financial statements given to them are correct. GAAP is also important to auditors who verify whether the financial information provided, such as financial statements, faithfully represents the true financial position of a company. Based on this, the court and users make decisions on whether to trust a financial statement. As we have seen, GAAP accounting is not only important for investors and auditors, but it is also crucial for the efficient operation of an economy. The reliability of financial statements is critical since the functioning of the market depends on it. If financial statements are not trusted, then the market is paralyzed.

In order to comply with tax laws, which require financial statements to be prepared in a specific manner, a business may need to prepare full sets of financial statements to meet these requirements. Additionally, in order to obtain financing support from lending institutions such as banks, it requires the production of GAAP-compliant financial information.

The importance of GAAP accounting for a business is significant. In general, a business may decide not to use GAAP when it is not necessary to obtain capital from external users. For example, small or family-run businesses operating in a specific state or geographic area may find that GAAP might be a barrier to their success. However, this type of environment is shrinking, especially as more businesses gain access to the internet or choose to operate with online accounting software.