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GAAP stands for Generally Accepted Accounting Services in Knoxville Principles and is the common set of accounting standards, rules, and procedures that publicly traded and many private companies in the United States must follow when preparing their financial statements.
Think of GAAP as the rulebook that ensures financial reports—like the Income Statement and Balance Sheet—are consistent, comparable, and reliable, allowing investors and creditors to make informed decisions.
GAAP is essential because it brings uniformity and credibility to financial reporting. Without a common set of rules:
Comparability would be impossible; Company A might value inventory differently than Company B, making their financial performance appear drastically different even if their operations were similar.
Transparency would suffer, allowing companies to manipulate their books to hide poor performance or tax liabilities.
The standards are primarily set by the Financial Accounting Standards Board (FASB).
GAAP is built upon several foundational principles that guide how transactions are recorded and reported:
When a situation involves uncertainty, accountants should choose the method that results in the lower asset value or lower profit. This principle aims to avoid overstating the company’s financial condition.
Example: Anticipated losses must be recorded immediately, while anticipated gains are not recorded until they are certain.
Revenue is recorded when it is earned, not necessarily when the cash is received. “Earned” usually means the company has satisfied its performance obligation to the customer.
Expenses should be recorded in the same period as the revenue they helped generate. This ensures that the true cost of doing business is accurately reflected alongside the income it Accounting Services Knoxville.
Example: The cost of goods sold (an expense) must be matched to the period in which the corresponding sales revenue was earned.
Most assets are recorded and remain on the balance sheet at their original purchase price (historical cost). This provides an objective, verifiable value, even if the current market value is higher.