Accounting and Bookkeeping

Generally Accepted Accounting Principles

Oct 01, 2020

What is GAAP?

GAAP is an acronym for Generally Accepted Accounting Principles. These principles constitute preferred accounting treatment.

GAAP includes definitions of accounting concepts and principles, as well as industry-specific rules. The main purpose of GAAP is to ensure that financial reporting is transparent and consistent from one organization to another. 

Who sets GAAP?

Currently, the GAAP policies are set primarily by three entities:

  1. Financial Accounting Standards Board (FASB)
  2. American Institute of Certified Public Accounts (AICPA)
  3. Securities and Exchange Commission (SEC) (for publicly held organizations, requires usage of GAAP)

The FASB pronouncements are contained in the Accounting Standards Codification, a centralized resource. 

What is the hierarchy of these pronouncements?

Under GAAP, the FASB pronouncements (ASC) are the top-level guidance and take precedence over the AICPA pronouncements.

Does GAAP apply to non-profit organizations?

Yes, the Accounting Standards Codification typically applies to both for-profit and non-profit organizations. There are certain pronouncements that apply only to non-profits and certain that do not apply to non-profits. 

The goal of GAAP is to ensure that the financial statements for for-profit entities are consistent across industries, allowing investors and the government to interpret them more easily. GAAP rules for nonprofits are intended to create transparency for donors, including grant-makers, as well as helping the government monitor whether an organization should retain its tax-exempt status.

In addition to general GAAP principles, the rules that apply only to nonprofits include:

  1. Labeling net assets: Net assets included in a nonprofit's statement of financial position should be labeled according to whether they are donor restricted or without donor restrictions.  The donor restrictions can be imposed by the terms of a grant or other document received from the donor.
  2. Describing cash flow: In addition to quantitative information listed on the statement of financial position, nonprofits must provide qualitative information that describes how they manage their liquid resources to meet everyday expenses.  Nonprofits must show any limitations or restrictions that impact their cash flow.
  3. Investments: Nonprofits should be aware of any management fees related to their investments, as they do not need to report these separately. Instead, nonprofits are required to report investment income net of related external and internal expenses.
  4. Contributions:  The accounting staff should closely monitor and record all contributions, including amounts received from individuals, corporations, or other nonprofits, in compliance with GAAP. In addition, you must record promises to give future donations as pledges receivable when you receive the pledge, rather than when your nonprofit receives the actual donation.

This article contributed by Calibre CPA Group (