August 12, 2022  |   5 min read

But Wait There's More GAAP!

Welcome back to the Friday Five.  Last week we began examining the 10 principles of GAAP.  For those who didn’t get a chance to see last week’s post – or want a refresher – check out the first half of the Generally Accepted Accounting Principles.  Building off that scintillating blog post, we’ll aim to further help you improve accuracy, consistency, and comparability for financial reports. 

Without further adieu, here’s the next set of accounting principles: 

6. Principle of Prudence: There is no speculation in the reporting of financial data

Financial reporting is very matter of fact. Transactions either happened, or didn’t.  Accounting is not guesswork, therefore current assets should be valued at their market value.  Additionally, that means profit you expect should not be added until it occurs. While this might sound overly cautious – and to be sure, it is –  being safe over sorry is always advisable when reporting financial data.

7. Principle of Continuity: Asset valuations assume the organization’s operations will continue

Otherwise referred to as The Principle of Going Concern. In words we can all digest, this means there is an assumption the business will not be forced to close or liquidate its assets. This particularly applies to valuing assets as it can be done in different ways. For example, if an organization has open concerns of failing, it would value assets at current market value in case they need to be sold.  

On the other hand, if an organization assumes it will continue to operate indefinitely, the assumption is the asset will be used for its full lifetime. This allows the asset’s value to be depreciated across its useful lifespan.

8. Principle of Periodicity: Reporting of revenue is broken down into accounting time periods like quarters or years

What good is tracking information if it’s not analyzed and reviewed?  Business activity remains in constant motion. While transactions should be recorded and financials maintained as they occur, it is unrealistic to review these daily.  A common tactic is to break the business cycle into manageable periods, such as quarters or years.  

For those which break periods into years, there are two ways to do this: either the calendar year or a fiscal year.  

The calendar year is as it sounds, from January 1 through December 31.  A fiscal year may be better for your organization if there are many programs and actions in place during the winter.  Fiscal years are decided upon by the organization and can start anywhere as long as they return to the same point a year later, such as June 30 to July 1.

9. Principle of Materiality: Financial reports fully reveal the organization’s monetary situation

Similar to the other principles rooted in truthfulness and accuracy, Accountants should strive to report an organization’s financial well-being as it is. Not as it is hoped to be. Regardless of the purpose, all information must be reported regardless of whether it reflects positively or negatively.

10. Principle of Utmost Good Faith: All parties are assumed to be acting honestly

This principle is derived from the Latin phrase uberrimae fidei which translates as “extreme good faith.” This is commonly used in insurance contracts and implies that any contract or financial transaction is carried out as it is described. This means that accounting transactions should be recorded in an ethical manner and as they actually occurred. Seems simple, but not doing so can land you in a big mess in a real hurry. Honesty is always the best policy.

Now that we finished reviewing the 10 GAAP principles, you and your organization are ready to take on the accounting process in an accurate,  comparable, consistent manner.  These are not only best practices, but also required by the U.S. Law.  If you have any questions or want to learn more about our amazing Accounting team and processes to see if our organizations would be a good fit, check out our website.

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