Generally Accepted Accounting Principles (GAAP) is a set of standards adopted by the U.S. Securities and Exchange Commission. Using GAAP is an important part of corporate financial reporting because it ensures that a company’s accounting practices follow a common definition and consistency. But why is it so important to understand GAAP? How can you make your business more transparent? This article will explain why GAAP is so important to your company’s financial health.
A company’s revenue and expenses should be matched. Generally, revenues should be recorded at the time the work is performed, the product is produced, or the contribution is made to revenue. An expense must not be charged to the current period if it does not directly contribute to revenue. By following the matching principle, a company can better evaluate its profitability and performance. Examples of this principle are depreciation and cost of goods sold.
Another important aspect of accounting is the accrual principle, which requires that companies record revenue and expense in the periods they occur. An accrual principle requires a company to record revenues and expenses as they are earned. A matching principle requires a company to match its revenues and expenses to the period in which they occur. A conservatism principle requires companies to record assets when they are certain. For example, an organization can use a cash flow statement to determine how much cash it has to pay.
The purpose of accounting principles is to ensure consistency. The application of these principles will help the auditors review other organizations’ financial statements. These principles also ensure that an organization will continue to operate in the future. A thorough understanding of the financial statements is essential for a company to grow and thrive. When the principles of accounting are followed, the company can create a more accurate and transparent financial report. If you’re an auditor, then you should always seek an expert opinion on the company’s financial performance.
As a businessperson, you should always follow these principles. For example, a company may have a lot of assets and little money but no revenue. Those expenses should be accounted for in proportion to the revenues. If there are costs that are not related to revenue, they should be recorded in the same period. The company’s expenses and revenues must be matched by this principle. This principle is important for the proper functioning of an organization.
Whether a company has revenue or costs is important in determining how the business should account for these. For example, two companies, Company XYZ and Company ABC, sell widgets. In 2018, they sell $550,000 worth of widgets, while Company ABC sold $750,000. These companies have similar revenues and costs. The revenues and expenses in each company are recorded as they are earned. Therefore, it is important to consider which is more important.