The key to proper business practices is having accurate records of how much the business has received and spent to achieve this. Accounting rules and policies, referred to as Generally Accepted Accounting Principles (GAAP), offer a coherent framework for accountants to make coherent and reliable financial statements. Familiarizing yourself with the details and provisions of these standards is necessary for you to know that your financial reports are accurate and presented honestly.
The Importance of GAAP Standards
The accounting principles that need to be followed in preparing the financial statements by a company are known as the generally accepted accounting principles or GAAP. The idea of these principles is to maintain comparability in the general content of reported values using different reporting entities with the aim of making values easier for investors, regulators, and stakeholders to compare.
It also enables you to present balanced and reliable financial information to increase revenue, which is crucial to securing investors’ confidence. This is very risky since eminent non-adherence to GAAP can, time and again, cause misinterpretation of the actual position, as well as legal and monetary consequences.
Key GAAP Principles
GAAP has a golden rule that when an entity selects a method of accounting, it should not switch from the selected method if there is no well-founded reason and proper disclosure is made. This helps greatly in making comparisons over time. The relevance principle also highlights that the information that is presented should be useful for decision-makers. It also consists of instantaneous derived, predictive, and post-activity feedback values.
Reliability is the principle that your financial data must be accurate and credible, and it has to produce exact value that portrays the company’s financial position. Last but not least, the comparability principle helps the stakeholders to make comparisons regarding the financial statements of your organization to those of other entities that would help in a clear understanding of your financial performance.
Challenges and Solutions
Although GAAP standards offer guidelines for these practices, you might encounter difficulties when applying them. An example of a commonly faced difficulty is the proper presentation of specific activities and operations in financial statements. As such, it may be useful to seek advice from accountants or use specific accounting programs that can assist with solving such problems.
The other dilemma can be summarized as relaying to all subordinates engaged in financial reporting the importance of GAAP and their compliance with it. The problem can be addressed through more training that incorporates role plays and the setting of internal policies and procedures to be followed. This makes it also important that users never consider what they learned yesterday sufficient for today’s business environment and its dynamics on GAAP standards.
Conclusion
Demonstrating compliance with generally accepted accounting principles is crucial at any given organization in the preparation of credible account reports. You notice how the principles discussed above contribute towards the maintenance of high standards of integrity and transparency in financial statements as well as recognize strengths and overcome weaknesses that may be a challenge to such objectives.
