About GAAP

While many businesses assume that accountants are bound by generally accepted accounting practices and the these are inviolate, nothing might be further from the truth. Each one of these dependant upon interpretation, and GAAP is no different. For one, GAAP themselves permit alternative accounting methods to be used without doubt expenses and for revenue in certain specialized kinds of businesses. For an additional, GAAP methods require that decisions be made about the timing for recording revenue and expenses, or they require that key factors be quantified. Deciding on the timing of revenue and expenses and putting definite values on these factors require judgments, estimates and interpretations.

The mission of GAAP over the years has been to standardize accounting methods in order to bring about uniformity across all businesses. But alternative methods are still permitted for certain basic business expenses. No tests are required to determine whether one method is way better than another. A business is free to select whichever method it wants. However it must choose which amount of good sold expense method to use and which depreciation expense strategy to use.

For other outlays and for sales revenue, one general accounting method have been established; there aren't any alternative methods. However, a company has a fair amount of latitude in actually implementing the methods. One business applies the accounting methods in a conservative manner, and another business applies the methods in a more liberal manner. What you ll end up with is more diversity between businesses of their profit measure and financial statements than one might expect, considering that GAAP have been evolving since 1930.

The pronouncement on GAAP prepared by the Financial Accounting Standards Board (FASB) is now a vertual 1000 pages long. And that doesn't even comprise of the rules and regulations issued by the government regulatory agency that jurisdiction on the financial reporting and accounting steps publicly owned businesses - the Securities and Exchange Commission (SEC).