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August 5, 2022 | 7 min read
Happy Friday and welcome back to your favorite Friday blog post! In past editions of the Friday Five we’ve talked about accounting basics and building a glossary. So today we’re combining the two to focus on GAAP. What’s that you ask? Well, in this two part series about Generally Accepted Accounting Principles (GAAP) you’re about to find out.
Simply put, GAAP encompasses common procedures, rules and standards that are issued by the Financial Accounting Standards Board (FASB). (Lots of acronyms, we know.) And the goal of GAAP is to improve accuracy, consistency, and comparability of financial statements across organizations. While these are best practices, both businesses and nonprofit organizations are also required by United States law to adhere to these principles. GAAP standards are broken down into 10 concepts and this week we will be looking at the first five:
Hopefully you did not think that these principles were only guidelines or preferences – they are required. The established rules and regulations have been created to help organizations record and display information in a concise and orderly manner. But, like most things, there is a learning curve associated with accounting and while a degree is not required it is recommended to work with accountants who have certifications or degrees in the field. With these credentials it can be safe to assume that your accountant will have a good understanding of the rules of the trade. Certifications and degrees in accounting can be earned from accredited universities and online classes; and learned from books or training and shadowing with practicing accountants.
Consistency is one of the most important principles because what good are rules and standards if they are not always used. While there may be different ways to record a transaction, doing it the same way every time allows for a smoother review process along with a more accurate comparison. These comparisons allow you to look at two separate periods, whether that be consecutive months (such as July versus August) or year over year (such as July 2021 versus July 2022). For this reason when accountants make changes or update standards they are expected to disclose the reasons for doing so and then to continue such practices moving forward.
While an accountant should work to help the organization stay within its budget and to be financially successful, some can take things too far. But, there is a legal line at committing fraud and an accountant’s role should always be to depict the organization’s financial state in both an accurate and impartial manner.
Overseeing nonprofits is the federal office of Management and Budget. According to nolo, a legal encyclopedia, any nonprofit that spends over $500,000 or more in federal funds is required to have a single audit. These audits serve as an equalizer and if anything was done outside of what’s allowed, the audit will expose both the organization and anyone involved in fraud, accountants included.
Tip: there’s no better time to put organizational practices in place than right now and there’s no time to waste in preparing for next year’s audit. Check out our post with audit preparation tips to save time and hassle when your next annual arrives.
Similar to the second principle, above, consistency is important for preparing financial reports. The benefit of using the same preparation process allows for accurate comparison across periods. Additionally, two similar organizations can be compared.
Transparency is essential and an accountant should not withhold information about the financial health of an organization. This fundamental is applicable no matter what, and applies whether the information is positive or negative. While it would be great to always be doing well, there should not be any debt compensation that occurs if fundraising does not quite meet the original goals.
Hopefully, the first 5 GAAP principles help to show the importance of accurate information as well as maintaining a consistent recording process. We’ll be back next week with the next 5 GAAP principles. And in the meantime, if you would like to learn more about the accounting team or see if our organizations would be a good fit, check out our website.
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