Generally Accepted Accounting Principles GAAP Guidelines & Policies

This is the system used by individuals when budgeting household expenses and by some small businesses. The matching concept or revenue recognition concept is not used in the cash accounting method. The matching principle is used to accurately record expenses within an accounting period.

The proper recognition of expenses is important as it impacts how the revenue is recorded. Under the matching principle, expenses and revenues that are related to one another should be recorded in the same period. This principle impacts the income statement and is intended to help accurately report an entity’s profitability in a specified period.

Non-GAAP Reporting

This allows for better matching of expenses to the revenues generated by the asset over its useful life. Ensuring that accounting information is objective requires entities to report financial statements that are independent. IU fiscal officers can be independent from the financials of their department law firm bookkeeping by reporting with integrity and not letting personal opinions or biases sway their reporting. To ensure this, financials should be supported with strong, unbiased evidence and research. The objectivity principle is used to confirm that the financial statements are free of opinions and biases.

The table below presents IBM’s fourth-quarter earnings report from 2016. These figures provide an excellent example of how the inclusion of non-GAAP earnings can affect the overall representation of a company’s success. The first column indicates GAAP earnings, the middle two note non-GAAP adjustments, and the final column shows the non-GAAP totals. With non-GAAP metrics applied, the gross profit, income, and income margin increase, while the expenses decrease. The GASB was established in 1984 as a policy board charged with creating GAAP for state and local government organizations. Many groups rely on government financial statements, including constituents and lawmakers.

Example of the expense recognition principle

For example, potential losses from lawsuits will be reported on the financial statements or in the notes, but potential gains will not be reported. Also, an accountant may write inventory down to an amount that is lower than the original cost, but will not write inventory up to an amount higher than the original cost. Governments and public companies abide by these accounting principles to ensure all documents present consistent, accurate, and clear reports.

As you transition from early, speculative investments (e.g. seed funds, your wealthy uncle, etc.) to sophisticated and institutional sources of capital, your accounting method needs to evolve as well. The more you raise other people’s money, the more important the transparency provided by GAAP becomes. GAAP also gives you the deep, objective visibility into your finances you need to speak intelligently about your business; it allows you to think like an investor.