The term “CIA” often manages to confuse accounting beginners. Do not worry – the acronym is simple to understand. In this article, we will tackle the concept of CIA, or “Generally Accepted Accounting Principles”, and explore four incredibly important chapters of this complex topic – definitions, importance, key points, and application.
In comprehensive terms, Generally Accepted Accounting Principles (GAAP) is a set of guidelines which provides a standard framework and dictates the format in which businesses, governments, and organizations prepare their financial reports. Due to its inner connection to public accounting and transparency, GAAP is an indispensable tool and is seen as the basis for all forms of financial analysis. The concept is more than a hundred years old, initially having developed to address problems arising from inconsistent accounting methods.
Definitions
The Generally Accepted Accounting Principles (GAAP) is a set of global rules adopted by the Accounting Standards Board (ASB) that regulate the preparation and maintenance of financial statements.
GAAP is invaluable in providing consistency and accuracy to the financial statements of a business, organisation, or government. To become and remain GAAP compliant, financial organisations must follow certain steps, including using the right naming conventions, presenting the right information on an income statement or balance sheet, and engaging only in recognised accounting methods such as double-entry bookkeeping. Businesses must also adhere to specific rules concerning the recognition of foreign currency transactions.
Importance
The Generally Accepted Accounting Principles are significant in providing uniformity and transparency to financial reports. Without this incredible set of guidelines, each corporation would be compiling and presenting financial documents in a variety of ways. This would lead to difficulty in comparing one organisation’s performance to another, hindering sound and successful investment decisions. GAAP also serves to boost investor confidence in companies and the stock market as a whole.
GAAP also plays an integral role in helping the governing bodies detect accounting fraud and malpractice. Regulatory agencies such as the US’s Internal Revenue Service use GAAP to ensure taxes are paid correctly, since financial statements prepared with these guidelines provide shareholders, creditors, and the IRS with an accurate representation of the company’s financial activities.
Key Points
The Generally Accepted Accounting Principles have come to be established as the standard set of conventions and rules that provide the foundation for any financial report prepared in the US. The ASB currently maintains and updates the rules in GAAP, which span topics ranging from inventory to leasing.
These guidelines should be consulted before the preparation or review of any financial statement; small businesses often utilize the services of an accountant to ensure their reports are in line with the GAAP. Unfortunately, small business owners should be aware that the GAAP is not simple to follow – it is an incredibly complex set of rules. The upshot of this complexity is that these rules represent the gold standard for any financial report.
Application
The Generally Accepted Accounting Principles are mandatory in the United States, and their demands are now part of the curriculum for most accounting and finance programs. However, overseas, different countries have their own sets of regulations, such as the International Accounting Standards (IAS) used in Europe. Understanding the different sets of rules for International as well as domestic business is essential for any financial professional.
The guidelines set in the Generally Accepted Accounting Principles cover various financial matters, from taxes to expenses. Companies must be aware of these regulations to ensure they are compiling the correct financial reports in the right format, which then assists the organization in planning strategies to succeed in the long run.
Common Challenges
Regionally-focused authorities like the Financial Accounting Standards Board in the United States revise the Generally Accepted Accounting Principles (GAAP) periodically. It is common for commercial entities to find stringent demands posed by these changing regulations, since GAAP updates can drastically overhaul the way in which a financial report is presented.
In addition, the larger and more international the organization, the more complicated becoming and staying in line with GAAP can become. International business transactions can be especially tricky, since there may be certain specifics in GAAP disagreed upon by two countries. Recognizing how each location handles financial transactions is critical to achieving accuracy in financial reports.
Accountable Professional Designations
Given the wide-ranging topic known as Generally Accepted Accounting Principles (GAAP), Accountable professionals continually work to stay informed and improve their knowledge of the discipline. To achieve this, Accountable professionals can qualify for three main designations offered by the American Institute of Certified Public Accountants (AICPA); the Certified Public Accountant (CPA), Certified Managerial Accountant (CMA), and Certified Information Systems Auditor (CISA). Each of these certified professional designations offers credentials for Accountable professionals in the respective areas, certifying their competency and expertise.
In addition to helping Accountable professionals stay informed and up-to-date, obtaining a certification such as CPA can be a great way to stand out amongst Accountable professionals who have the same academic background and similar experience levels. Certification can help an Accountable professional meet the current industry standards and finance regulations which may not have been covered in their educational background.
Computer Techniques in Accounting
Accountable professionals are no longer required to manually pore over large, intricate financial documents – today, they can use incredible tools and computer techniques such as financial modelling, auditing, and data management to manage the accounting cycle, or the process of recording and classifying financial information.
For instance, financial modelling is the process of using a comprehensive model to analyse, compare, and predict scenarios quickly and accurately. This techniquue can be used to perform what-if analysis in order to simulate financial performance, and is mostly done with the use of budgeting and forecasting software.
Accountants also employ data management software such as Enterprise Resource Planning (ERP) systems to help with data entry, increase accuracy, and reduce bookkeeping burdens. ERP systems are also useful in providing real-time access to data, as well as alerts and reporting capabilities.
Security and Disclosure Standards
The Generally Accepted Accounting Principles (GAAP) also mandate certain regulations that require businesses to release financial statements to stakeholders regularly. This ensures GAAP guidelines are followed, increases transparency in accounting and reporting, and provides security that corporate documents are not being tampered with or misused.
In the United States, laws such as Sarbanes-Oxley, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Gramm-Leach-Bliley have further augmented the disclosure standards stemming from GAAP. These laws set standards for businessmanagers, clerks, and other Accountable professionals as to what details must be disclosed to the public, including instances of financial fraud and cyber-attacks.
Audits and Certification
A financial audit is often needed by businesses and organisations when the Generally Accepted Accounting Principles are in play, since these regulations demand accuracy and transparency in the financial reports. An audit is conducted to assess the validity and accuracy of the information presented in the financial documents.
This is done through the examination of documents, review of compliance with applicable accounting and financial procedures, as well as assessing the organisation’s internal controls. Certified public accountants usually conduct audits, as they are experts in financial reporting.
In the event of a financial audit, Accountable professionals may have to use the services of an accredited Chartered Accountant to certify their financial statements. Chartered Accountants are licenced and trained experts in accounting and finance who can evaluate financial statements and attest to their accuracy.
Additionally, financial statements can also be certified by an Internal auditor, which is an Accountable professional employed in an organisation to guarantee the accuracy of the financial statements. Internal auditors can also make recommendations for reducing financial risk and to improve the efficiency of operations and internal processes.
