Financial Accounting For Dummies. Maire Loughran

Chapter 17.

I know your spoon is probably full at this point, but before I explain what GAAP are and why they matter so much, I need you to swallow just one more acronym. The FASB formed the Emerging Issues Task Force (EITF) in 1984 to help identify emerging accounting issues in need of standardization. The EITF is composed of accounting professionals who meet six times a year with nonvoting members of the SEC and FASB to mull over current economic, business, and industrial developments.

      Understanding generally accepted accounting principles (GAAP)

      GAAP define for financial accountants the acceptable practices in the preparation of financial statements in the United States. The preponderance of the information I provide in Parts 3, 4, and 5 of this book directly ties back to GAAP. Specifically, GAAP tell financial accountants exactly how financial data has to show up on the income statement, balance sheet, and statement of cash flows.

      For example, GAAP state that assets, liabilities, and equity go on the balance sheet and not on the income statement. GAAP are also pretty darn picky as to how these accounts are arranged on the balance sheet (see Part 3). In addition, GAAP give specific rules for separating operating revenue (which is related to the business purpose) from non-operating revenue (non-business-related revenue, such as profit from selling a company asset), which I explain in Chapter 7.

      

Like most things in life, there are exceptions to the rule that all businesses must follow GAAP. Some businesses can deviate from GAAP, a topic that will be briefly covered in your financial accounting course. However, your financial accounting class likely won’t concern itself much with these exceptions to the GAAP rule.

      Are GAAP the same for public and nonpublic companies? For now, yes. FASB sets accounting and reporting standards for both, which also include not-for-profit organizations. The SEC has the statutory authority to set accounting standards for publicly held companies, but historically it has relied on private sector bodies to set those standards.

      

Accounting and reporting for not-for-profits are topics outside the scope of this book, and you won’t be tested on it in your financial accounting course. The only takeaway you need to have is that not-for-profits use fund accounting. For example, donations to neuter shelter animals go into a restricted fund to be used for that purpose only. Not-for-profits generally do not report net income.

In the past, establishing and modifying GAAP were collaborative efforts among several different standard-setting bodies: the FASB, the EITF, and the AICPA. At the AICPA, this task fell specifically to the Financial Reporting Executive Committee (FinREC), which is a senior technical committee composed of a Chair and 15 members.

      

But hold onto your hats! How financial accountants view GAAP changed in 2009 with the adoption of FASB Accounting Standards Codification. As of July 1, 2009, the FASB Accounting Standards Codification (ASC) became the single source of non-governmental authoritative GAAP in the United States. Before you get in a dither, keep in mind that the ASC doesn’t change GAAP; the FASB didn’t rewrite all the accounting rules as of July 1, 2009. Instead, the ASC organizes GAAP in a more user-friendly fashion and (mercifully) uses a consistent format across the board for all GAAP topics.

      Looking online for the FASB’s standards

      The FASB allows free, limited access to the Accounting Standards Codification. To check it out, go to http://asc.fasb.org/. Look for “Go to Codification” on the home page, confirm that you aren’t a robot and click Access Basic View. Finally, accept the Basic View Licensing Agreement to access your free view.

      After you complete that log-in procedure, on the Basic View home page you can browse the topics on the left-hand task bar to see how to apply GAAP for accounting topics such as revenue (which I discuss in Chapter 10 of this book), assets, liabilities and equity (which I discuss in Part 3), and presentation (see Chapters 15 and 16). Each topic allows you to drill down to more detailed information. For example, if you select “Equity,” you can further select “Treasury Stock” (which I explain in Chapter 9) to find out how to account for treasury stock under GAAP.

      

The ASC professional version annual subscription costs $1,086. Ask your financial accounting instructor if your school has academic accounting access. If so, you’ll have free access to better search functions that allow for a fully functional view of the codification.

Part 2

      Reviewing Some Accounting Basics

IN THIS PART …

       Dig into collecting, sorting through, and entering accounting data into business accounting software.

       Get a primer on the difference between the cash and accrual methods of accounting.