GAAP is a generally accepted accounting principle, guide or best practice developed by the Financial Accounting Standards Board. In short, the GAAP standard ensures that American bookkeeping is accurate, consistent, reliable, and easy for anyone who is familiar with financial statements to interpret. Publicly traded companies must comply with GAAP standards, but for private companies, this is an option. Because it is always a good idea to follow "best practices" in any industry [after all, they are built as best practices for some reason!] Small business owners wisely find a virtual bookkeeper who abides by GAAP financial accounting standards .
GAAP constraints are important because they help ensure the objectivity and authenticity of the report. Let's explore the main GAAP constraints and what they mean to ensure a more accurate financial accounting record.
Objectivity - Financial statements are factual statements, not opinions or explanations. The GAAP objectivity principle ensures that all data contained must be supported by verifiable evidence.
Importance - As with the disclosure principle, an importance constraint means that if the information is important to a third party reviewing and analyzing your financial statements, it should be included.
Consistency - You must use the same financial reporting method each year. According to the GAAP principle, this is an accounting method based on accrual accounting. Using this method, using cash accounting, requires special permission and must be reported in the notes to your company's financial statements. If you currently use cash accounting for small businesses in Indiana, your financial statements are not GAAP compliant. Virtual bookkeepers can help you transition to accountability and GAAP compliance based on accrual.
Be cautious - this simply means acting cautiously when reporting your profits and assets on an accrual basis. Don't risk exaggerating assets and income.
But if you do business internationally, as many of us do in today's connected world, your financial bookkeepers and part-time financial controllers should be aware of another set of standards: IFRS. Like GAAP, these are the best practices used by bookkeepers and financial accountants. These are the standards adopted by European countries and most other developed countries in the world.
If you are looking for international investment capital, plan to acquire a company or do business with an overseas company, or sell your goods and services internationally, you will need a bookkeeper to use the IFRS standard for small business bookkeeping if necessary.
Many GAAP and IFRS practices overlap, but there are some significant differences between the two sets of financial accounting standards. Some changes may exist in the following areas:
- When confirming income
- Inventory accounting
- Stock compensation
In the next few years, publicly traded companies will face a shift in GAAP and IFRS principles, resulting in a new global financial accounting standard based primarily on IFRS principles.
However, private US small businesses will continue to choose which accounting standards to follow. In today's global economy, bookkeepers with GAAP compliance but familiar with IFRS standards may be best suited to help your company grow.
Orignal From: GAAP in the international business world
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