GAAP: Generally Accepted Accounting Policy in Business
Accounting is a continuous process where an entity keeps financial records to maintain and measure its financial performances. It can also define as the production of financial records about an organization or individuals. Generally, it produces financial statements like journals, trial balance, profit and loss statements, bank reconciliation statements and balance sheet etc. In the present era, accounting plays one of the most significant roles to determine the success of any organization. It is something that nobody can underestimate at any cost to launch a successful business and maintains its’ effective operation. Proper implementation of accounting can help a business in keeping track of its finances along with maintaining the tax. Keeping a track of finances on a regular basis is very essential and need for improvement in any business.
Accounting principle is a standard that governs the current accounting practice and that is used to determine the appropriate dealing of complex transactions. It can be also defined as the specific guidelines and procedures used by a company to prepare its financial statements. So, it is the set of common standards and procedures used by companies to compile their financial statements. GAAP is an international convention to ensure high-quality accounting practices based on some core principles. In another word, it can be stated as the standard framework of guidelines for financial accounting used in any given jurisdiction. These include the rules, standards and conventions of recording and also summarizing and in the preparation of financial statements. It imposed on companies so that investors can get a minimum level of consistency in the financial statements. These statements are used to analyze companies for investment purposes. It makes information available to investors and lenders to make sound decisions.
A business also known as enterprise or firm is an organization that engaged in the trade of services or goods to consumers. Businesses play the predominant role in the capitalist economies. Most of the business is profit oriented privately owned but it may also be a nonprofit organization and also state owned.
Relationship between GAAP and Business:
Accounting is also known as "the language of business” because with the financial statements of a business, investors and others can get a clear idea about that entity. Every business needs to exchange money with their customers as well as their investors. The owner needs to buy merchandise or raw materials to produce new goods. He needs to buy furniture, machineries or some other office equipments also. Beside these, he has to pay rent, salary of the employee and many other expenses. If business owners ignore maintaining the record of expenses, then he may find himself in a financial problem. Accounting helps to maintain cash inflow and outflow to determine the cash in hand of any business. It is known to all that, the main purpose of a business is making profit. If a business failed to track its’ sales, inventory, expenditure and other necessary records then it is impossible for that business owner to get idea whether his business is making a profit or not. But, with the help of accountancy and generally accepted accounting policy, an owner can track his transactions and can prepare its’ financial statements. At the end of the fiscal year those statements like profit and loss account and balance sheet can be very useful to determine the status of the business.
Why GAAP is important in Business:
Generally Accepted Accounting Principles is the standard guideline and rules to maintain the daily records of a business. The importance of generally accepted accounting principles in a business is given here:
- GAAP helps businesses maintaining consistency in their appearance of financial information. Companies provide a true and fair presentation of financial information through the use of GAAP.
- A business is a daily operation and it needs to maintain and keep records of its daily transactions. GAAP prepared statements are not only for a specific time duration, it is also kept on a daily basis.
- It can help an organization to figure out whether it is making money or not. Most of the businesses are profit oriented and investors want to make profit.
- It can help to make decisions about cash flow. If business owners ignore maintaining the record of expenses, then he may find himself in a financial problem.
- It offers the chance to compare the financial status of the business with similar types of company.
- Audited statements of a business by a reputed accounting firm can help the owner to make the decision to raise capital or sell their businesses. It may also increase the interest of foreign buyers.
- The financial statements like balance sheet helps to determine the company status in a quick glance.
- The owner can minimize the risk of his business with the help of various financial statements.
- It can increase the stakeholder trust. GAAP guidelines give assurance that the financial statements were prepared using without fraudulent.
Implementation of GAAP in business:
Most of the businesses apply GAAP to maintain proper financial statements for their company. Accountants must rely on their own knowledge and professional judgment when deciding how the GAAP concepts should be interpreted and applied.
First of all, the business should have to determine whether it will maintain its financial statements or not. If the company trade publicly, then it should use GAAP. It is in the law that, public limited companies need to use generally accepted accounting principles. If it is dealing privately then it is not necessary to prepare financial statements. So, it may ignore the GAAP to maintain statements.
Secondly, if the business is already maintaining its financial statements then it should have to audit those statements by a certified auditor. A charter accountant is perfect for this job and he will confirm that the business is using GAAP.
The accounts related statements refer the financial information of a business. To make this information meaningful to others, the regulatory personnels impose some specific rules, procedure or principles. Those are accepted all
over and make sense that generally accepted accounting policy is the best way to get an idea about a business.