What Is GAAP Accounting?

by Julie Powers - Updated September 26, 2017
What Is GAAP Accounting?

GAAP--"generally accepted accounting principles"--are a common set of accounting rules, standards and procedures. They are used to prepare, present and report financial statements for publicly traded and privately held companies, nonprofit entities and federal and state governments in the United States. GAAP are not written in law, but are a combination of authoritative standards set by policy boards that help creditors, investors and auditors make better financial decisions. These decisions help the economy run more efficiently.

Objectives

The four fundamental qualities financial statements must possess are relevancy, reliability, consistency and comparability. GAAP's four concepts each has the following: assumptions, principles and constraints. The four basic assumptions for financial statements involve economic entity, going concern, monetary unit and periodic reporting. The four basic principles are historical cost, revenue recognition, matching and full disclosure. The four constraints are objectivity, materiality, consistency and prudent principles.

Financial Accounting Standards Board (FASB)

The Financial Accounting Foundation (FAF) established FASB in 1973. The FASB is recognized as the top authority by the Securities and Exchange Commission (SEC) and the American Institute of Certified Public Accountants (AICPA) for establishing generally accepted and authoritative standards of financial accounting for nongovernmental entities. FASB publishes Statements of Financial Accounting Standards, Statements of Financial Accounting Concepts, Interpretations and Technical Bulletins.

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FASB Accounting Standards Codification (ASC)

On June 30, 2009, FASB issued FASB Statement No. 168, which states that on July 1, 2009, the ASC will become the source of authoritative U.S. GAAP to be applied to nongovernmental entities. After sorting through thousands of nongovernmental accounting pronouncements and standards used in the previous GAAP hierarchy (A-D), the FASB ASC categorized approximately 90 topics. In addition with guidance from the SEC, it is an application that significantly changes the way accountants, auditors and academics perform accounting research. This Codification will provide easier access to all authoritative U.S. GAAP in a relevant and organized application.

GAAP Hierarchy

After the new FASB ASC was put into effect, the AICPA had established a GAAP hierarchy with its foundation based on the principles established by the FASB. This hierarchy included four successive categories from A-D. These categories included standards, interpretations, opinions, bulletins, positions and guidelines (for example, AICPA Accounting Interpretations in Category D). Category A had the highest authority for rules of financial reporting. However, as of the date above, the ASC has decreased the GAAP hierarchy to two levels: one that is authoritative with FASB ASC and one that is non-authoritative with FASB ASC.

Accounting Standards Updates

Instead of accounting standards in the form of statements, positions and abstracts, the FASB will issue Accounting Standards Updates. These updates are not authoritative but they will serve to update FASB ASC, provide background information about the guidance and provide the basis for conclusions on changes made to FASB ASC. FASB ASC does not include governmental accounting standards but it does include some authoritative content issued by the SEC. However, it should not be considered the official rules and regulations of the SEC. The FASB ASC is not intended to change U.S. GAAP or any requirements of the SEC.

References

About the Author

Julie Powers lives in San Diego and has been writing professionally for eHow since 2009. She specializes in writing about business, real estate, health and pet topics. She works as an assistant to a real estate broker and applies her knowledge to her articles. She graduated from Indiana University's Kelley School of Business with a Bachelor of Science in management and entrepreneurship.

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