GAAP Generally Accepted Accounting Principles

There are notable differences between managerial accounting and financial accounting. Emphasis on the financial consequences of the past activities, mandatory external report and precision are only some of the elements financial accounting has different than the managerial accounting. Economic performance of a business is measured through the means of financial accounting. Resulting from the data analysis of the financial accounting are income statements and balance sheets. The main difference, however, between the two types of accounting is the need to follow or not the GAAP, or Generally Accepted Accounting Principles.

Business transactions are recorded with the help of GAAP. The statements of GAAP are not strict rules, but mainly guidelines to help a business properly record its financial activity. The statements should follow a minimum regularity for reporting statements. Following the GAAP principles gives more creditability to the activity of the business, standing as proof of its correctness and precision to the outside business environment. A report abiding with these principles is easier read and accepted by analysts and stockholders.

The GAAP regulates several principles. Among these, great importance have the accrual basis accounting principle, the economic entity assumption principle, the revenue recognition principle, the relevance, consistency and reliability principle, the cost principle and the materiality principle.

The accrual basis accounting principle relates to the financial aspect of the events developed by the entities during the period of time in which they occur. Revenues can only be recorded and reported when the cash is received. In return, expenses are only recorded and reported when the payment is done.

Any organization conducting economic activities is called an economic entity. In this category can be included schools, churches, hospitals and governments. Any events conducted by such entities must be recorded. The personal liabilities or assets relating to owners should not be recorded.

Revenue principle refers to the recording of the revenue when a product or service has been delivered, not at the moment of cashing in the value.

The relevance, consistency and reliability principle refers to the usefulness of information. Information can be useful only if it is relevant, consistent and reliable.