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How does gaap affect financial reporting

how does gaap affect financial reporting

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Cash and Accrual Bases

Cash and accrual basis accounting differ on the timing with which they choose to recognize the existence of transactions by recording them on the accounts. Cash-basis accounting recognizes revenues and expenses when cash or cash equivalents are either received or paid out. Accrual-basis accounting recognizes revenues and expenses when the transactions occur. Cash-basis accounting is clearer and simpler than accrual-basis accounting and therefore requires fewer rules.

Accounting Rules and Standards

In the United States, the Fair Accounting Standards Board, or FASB, is responsible for creating and revising the rules and standards that guide accountants. Other, similar organizations exist in other countries but an international equivalent exist in the International Accounting Standards Board, or IASB. Not all national organizations accept all rulings of the IASB. The influence of GAAPs is ubiquitous in accounting.

Assets, Liabilities

and Equity

Assets are the economic resources that businesses use to run their operations. Liabilities are the economic obligations that businesses incur in acquiring those resources. Equity is the portion of resources invested into the businesses by its owners. GAAP determines what transactions are recognized as which of the three categories of accounts, how much value to recognize of each transaction, and how these accounts are compiled into useful financial documents.

Revenues and Expenses

Businesses produce revenues but incur expenses in doing so in each time period in which they are operational. Revenues minus expenses is equal to either net income or net loss, which is either the business's financial gain or financial loss by running its operations in that period. GAAP determines what transactions to recognize as either revenues or expenses, how much of the transactions to recognize and when to recognize them.

Category: Personal Finance

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