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GAAP Essentials for Accounting Students

Quick Highlights:

  • GAAP are standards that guide the accounting profession, crucial for anyone becoming an accountant.
  • Public companies in the U.S. must follow GAAP for financial statements; it helps compare and understand these statements easily.
  • Learning GAAP is necessary for accountants, especially if working for publicly traded companies or handling significant financial reporting.
  • GAAP principles ensure financial integrity and help maintain trust in the financial markets and among investors.

Table of contents

What is GAAP? The generally accepted accounting principles (GAAP) are a series of standards that guide the accounting community. If you are planning on becoming an accountant, you will need to understand what GAAP stands for and how to put GAAP principles into practice. 

GAAP accounting is important to learn because it allows you to record and manage information properly. It is also a necessity if you want to work for a publicly traded firm in the United States, so learning about GAAP accounting principles is an important part of any accounting degree. 

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Overview of GAAP

If you’re just starting to research a career as an accountant, you may naturally wonder, “What is GAAP in accounting?” The Financial Accounting Standards Board (FASB) is responsible for determining what GAAP principles are and how to apply them in practice. GAAP stands for Generally Accepted Accounting Principles, and these principles are the ones that govern the profession of accounting in certain arenas. 

In fact, public companies are required to follow GAAP whenever they issue financial statements. These principles are also used in governmental settings as well. 

GAAP accounting exists to make it easier for companies to file consistent and complete financial statements. In addition, these standards make it simpler for someone to read and compare financial statements. 

This technique is different from pro forma accounting, which is a different technique. Outside of the United States, other countries use the International Financial Reporting Standards (IFRS). 

History of GAAP

Other than learning the GAAP definition, it is important to understand the origins of US GAAP standards. After the stock market crash of 1929, the United States experienced a severe depression. As a result of the Great Depression, new accounting principles and finance laws were implemented. 

These principles were first established through legislation in the 1930s, like the Securities Act of 1933 and the Securities Exchange Act of 1934. At the time, the federal government wanted to work with professional accounting groups to determine standards and best practices. Through the right standards, the government hoped to encourage accurate, reliable financial reporting.  

Since it was first created, GAAP has evolved. New rules and standards have been implemented. For instance, a 2018 rule change switched how the industry counted net earnings. Now, this figure includes unrealized capital gains and losses, which can vary widely from day to day for large corporations.  

Important Organizations Involved in GAAP

The most important organization involved in determining what GAAP stands for is the Financial Accounting Standards Board (FASB). Meanwhile, the IFRS is in charge of setting global accounting standards. The standards between these two organizations can vary. For instance, the IFRS doesn’t allow the use of last-in, first-out inventory accounting. 

Since 2002, the FASB and IASB have been working together on merging international and GAAP principles. Because of the success of these measures, the Securities and Exchange Commission (SEC) no longer required international companies to reconcile their IFRS reports with GAAP in 2007. 

This change was important for international companies. Prior to the new ruling, companies from outside of the United States had to use GAAP to make financial statements if they wanted to trade on exchanges. 

Key Principles of GAAP 

GAAP principles guide how accountants do their work. When you learn the GAAP basics for students, you will generally study the following principles and ideas.

  • Conservatism principle 
  • Consistency principle
  • Monetary unit principle 
  • Going concern principle  
  • Accrual principle 
  • Reliability principle 
  • Cost principle 
  • Revenue recognition principle
  • Time period principle 
  • Full disclosure principle 
  • Materiality principle 
  • Economic entity principle 
  • Matching principle 
  • Reliability principle 

Consistency, completeness, and comparability are three of the most important GAAP principles to remember. Completeness means that all material transactions should be properly accounted for. Meanwhile, comparability means following the GAAP rules so that financial statements between different companies and time periods can be easily compared. 

Consistency is particularly important because consistent techniques allow you to compare different statements. Sometimes, you will have leeway in how you track or calculate certain information. If you have a choice about how to do something, the most important thing is to make sure that you consistently use the same technique.  

Importance of GAAP in Accounting Education

Whether you are building a business or an entire economy, economic relationships are formed around trust. One of the reasons why the United States economy has flourished is because the legal system provides recourse if there is a contract dispute, so different parties can feel confident doing business together. 

The same trust is required for investors to give money to a business. GAAP principles aren’t just important for getting an accounting degree. They matter because they ensure the integrity and accuracy of your company and the overall financial markets. If a business doesn’t use GAAP, it will struggle to find funding. Vendors may also be unwilling to work with a customer that can’t demonstrate its financial position.  

On a more personal level, you have to know what GAAP stands for and how to use it to get your degree. While your state is in charge of licensing you as an accountant, the certified public accounting exam is the same in every state. To pass this test, you must understand GAAP accounting and other accounting principles so that you can answer questions on the test. 

GAAP in Practice

What is GAAP and how do you use it in practice? In practice, GAAP is used to create financial statements. Other than using GAAP accounting principles during your day-to-day life at work, you also need to use GAAP in specific scenarios. For example, companies must use GAAP accounting with financial statements if they want to list their business on a stock exchange. Similarly, a buyer will expect GAAP accounting if they are thinking about buying or investing in your company. 

If you don’t follow GAAP, it can lead to serious repercussions. You may have to deal with legal penalties and fees. Likewise, it can impact the profitability of your business if vendors or customers find out. 

Accountants aren’t required to follow GAAP unless they are working for publicly traded businesses. In these instances, not following GAAP accounting rules can lead to SEC fines and other penalties. 

GAAP and Your Accounting Career

If you want to pursue a career in accounting, it’s important to learn about GAAP while in college. GAAP teaches students about the ethics of the profession. More importantly, you will need to understand GAAP if you want to work at any company that is traded on a stock exchange. 

Even if you aren’t working at a large company, understanding GAAP principles helps to demonstrate your proficiency. In the future, it can help you achieve promotions to new roles at work. 

Learn More About GAAP Accounting

For many job seekers, GAAP accounting is a necessary skill. It is especially important if you want to work with a company that is traded on an exchange in the United States. In order to succeed in the industry and demonstrate your understanding of accounting ethics, you should take some time to learn more about GAAP ethics and procedures.