GAAP
Generally Accepted Accounting Principles, why they're important, and how they're used.
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Accounting Glossary
- Accounting 101
- Accounts Payable
- Accounts Receivable
- Accounting Software
- Accrual Accounting
- Adjusted Trial Balance
- Amortization
- Audit
- Balance Sheet
- Bad Debt Expense
- Bank Reconciliation
- Benefits
- Book Value
- Capital Asset
- Cash Basis Accounting
- Cash Flow
- Cash Flow Statement
- Chart of Accounts
- Class Tracking
- COGS
- Comprehensive Income
- Contractor vs Employee
- Cost of Sales
- CPA, Controller, CFO
- Credit and Debits
- Current Ratio
- Deferred Revenue
- Depreciation schedule
- Double-Entry Bookkeeping
- Earnings Before Interest and Taxes (EBIT)
- Equity
- Financial Reviews
- Fiscal Policy
- Fiscal Year
- Fixed Cost
- GAAP
- General Ledger
- Gross Margin
- How to Calculate Income
- Inventory
- Liability
- Liquidity
- Modified Adjusted Gross Income
- Net Income
- Operating Expenses
- Prepaid Expense
- P&L Statement
- Revenue Recognition
- Trial Balance
- Variable Cost
- Working Capital
- Write-Off
What is GAAP?
GAAP stands for “generally accepted accounting principles” and is used by businesses to:
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Properly organize their financial information into accounting records
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Summarize the accounting records into financial statements
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Disclose certain supporting information
Why is GAAP Important?
While it is particularly important in publicly traded companies, many investors and lenders require GAAP compliance as part of their decision-making process for all businesses.
GAAP is currently defined by the Financial Accounting Standards Board (FASB) and is primarily used by U.S. businesses. International Financial Reporting Standards, or IFRS, is the accounting framework used outside the U.S. GAAP has more rules than IFRS and, not surprisingly, is more difficult to understand. Still, it is considered to be a more comprehensive accounting structure.
GAAP makes it easier for anyone reading multiple financial statements from different companies to make a reasonable comparison since all of them have created their financial statements using the same rules. Some of the topics included in GAAP are:
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Assets and liabilities
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Financial statement presentations
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Expenses
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Equity and revenue
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Fair value
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Leases
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Non-monetary transactions
There may also be industry-specific accounting topics that can vary greatly from the more generic standards. Every company, publicly traded or not, should make sure its financial statements are GAAP compliant by having an external audit performed by a certified professional.
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