Generally accepted accounting principles are the ground rules used in the preparation of:

Business accounting procedures provide essential information that supports professional decision-making. Management and financial accounting are two methods for tracking, recording and interpreting financial information. They follow similar principles but are quite different in some very meaningful ways. Both types of accounting are essential for running a business. It is wise to establish both models early in the business and using them in tandem when making business decisions.

Management accounting and financial accounting both serve important roles within a business. The managerial vs financial differences are significant -- but equal in importance for any business.

How are Management and Financial Accounting Explained?

Management, or managerial accounting, is used internally to run companies and help managers make important financial decisions according to the Motley Fool. Managers must think about the future of the company, so management accounting is significant in planning ahead financially and projecting growth based on estimates of what will happen. Managerial accounting documents are proprietary for use only by personnel within a company, such as managers and executives. Managerial reports break down numbers and projections related to business transactions and how they impact the company. These reports are intended for internal usage and rarely to never are viewed by parties external to the business.

Financial accounting provides investors and tax professionals the hard business facts based on assets, liabilities and equity, so they can properly assess a company's performance and tax obligations. Financial accounting produces financial statements focused on historical information that external professionals need to gauge the solidity of a company. Because financial statements are designed for external review, they must abide by "generally accepted accounting principles" (GAAP) . This means that reports must be delivered in accordance with set ground rules to remain consistent and concrete every time.

What are the Benefits of Each Accounting Method?

Management accounting is focused on internal organizational goals for business. It is called managerial accounting because it is oriented toward providing information needed to make business decisions. One of the biggest differences between management and financial accounting is that management account does not follow GAAP the way financial accounting does. GAAP is the universal standard for financial accounting.

Financial accounting is significant in informing investors, tax professionals and creditors of a company's performance over a period of time, shedding valuable light on the past and present. Additionally, these reports are used to do a company's taxes, so they must be 100 percent accurate. Financial accounting reports are prepared by accountants and sent to entities outside of the company, such as stockholders, tax professionals and lenders. These reports show concrete numbers, as well as profits and losses. These documents are objective, factual and are not strictly internal documents.

What is GAAP?

Generally accepted accounting principles, or GAAP, are the strict guidelines set for by the Financial Accounting Standards Board according to Accounting.com. These rules include end-to-end principles, standards and procedures for ensuring the consistency and accuracy of accounting information on financial statements. Management accounting documents are never distributed externally and are therefore not required to follow GAAP guidelines. Often, management reports will include information that is not applicable for financial statements.

For example, the GAAP requires a piece of land be assessed at its cost in the past (its historical cost), while if a company is thinking about purchasing a plot of land, management will want to see the current value of the land, along with projections for future value.

How did Accounting Split into These Different Practices?

Management accounting predates financial accounting and was introduced at the end of the 1800s. It provided only the essential information needed to manage production of early products like steel and textile. At the time, there weren't shareholders and unsecured debt, so there was not a significant need for precise and extensive reports. In the early 1900s, accounting requirements standardized with the growth of credit, governmental regulation and taxes. Companies were required to provide financial reports to these outside entities, who wanted to keep tabs on money made. This was the beginning of financial accounting reports. GAAP was formally developed as a standard in 1939 according to the Strategic CFO.

Knowing the financial health of your small business is crucial to its success and survival, so accurate assessments of business transactions support your efforts. That's where bookkeepers and accountants enter the picture, professionals who can make sense of the daily transactions that accumulate through day-to-day business. They typically use a collection of rules called GAAP to guide their efforts. GAAP stands for Generally Accepted Accounting Principles – the rules of financial reporting that govern the accounting profession in the United States. The GAAP rules and regulations of accounting serve, in part, to outline the rules of financial reporting. With these standards, your company's financial records are prepared in a similar way to every other business that uses GAAP methods, resulting in financial reports that are easily understood by anyone who is conversant in the language of business, including manager, shareholders, bankers and potential investors.

GAAP and IFRS

GAAP is a comprehensive accounting method that includes both standards and procedures. Much of the rest of the world follows the rules of the International Financial Reporting Standards, but these are primarily conceptual, without the procedural content included with GAAP. The systems are compatible, though, so generally a business that complies to GAAP also complies with IFRS.

What Are the Generally Accepted Accounting Principles (GAAP)?

Given the scope and complexity of GAAP, its principles have both fundamental and detailed elements. GAAP has three parts:

• Basic accounting principles and guidelines.
  
• Standards and rules published by the Financial Accounting Standards Board (FASB) and its predecessors.
• Generally accepted industry practices, with input from professional accounting associations.

While there are many FASB standards and rules, as well as many industry practices included in GAAP, there are 10 basic principles and guidelines that establish the basis of GAAP. Knowing these helps you understand some of the seemingly counterintuitive procedures your accountant may insist upon. These basic principles and assumptions are:

1. Economic Entity Assumption: From a legal standpoint, only corporations are legal entities, while a business run by a sole proprietor is an extension of that person. For GAAP accounting, though, the business is always assumed to exist as its own entity, and if the proprietor mixes business and personal finances, the GAAP accountant still treats these as separate. 
   
2. Monetary Unit Assumption: All transactions are expressed in U.S. dollars. 
3. Time Period Assumption: GAAP recognizes that time periods are integral to financial importance. Shorter periods may require more estimation, while longer periods contain less approximation. All time periods must be clearly and completely expressed to give context to financial reports. 
4. Cost Basis Principle: GAAP considers an asset's value at the time it enters a company's accounts. Generally, no asset is ever value-adjusted. Current market value of assets is not a feature of GAAP accounting. 
5. Full Disclosure: Financial documents prepared to GAAP standards cannot knowingly omit information that may affect accurate reporting of the business position. If a lawsuit settlement may affect a company's finances through settlements or payouts, for example, this must be noted in relevant financial reports. 
6. The Going Concern Principle: Documents created to GAAP standards reflect that a business is continuing operations with no plans to liquidate in the near future. 
7. Matching Principle (also Double-Entry System): Every transaction is entered as both an asset to one account and a liability to another, the fundamental of double-entry accounting. While accounting software may require only a single entry of transaction data, most applications create records to double-entry standards. 
8. Revenue Recognition: This principle holds that revenue is created at the instant a product is sold or a service is rendered, whether or not payment takes place at the same time. 
9. Materiality Principle: An accountant may violate some provisions of GAAP procedure when common sense allows that a GAAP procedure is excessive for the value of the transaction. For example, the purchase of a $200 computer monitor and a $10,000 color copier should both be guided by amortization, but common sense has the monitor completely expensed in the year of purchase. Materiality also permits rounding of transaction amounts to the nearest dollar. 
10. Conservativism: GAAP principles always err to the side of lesser value in situations where different procedures result in different values. This is a procedural tie-breaker when more than one calculation is possible. 

Do Private Companies Have to Follow GAAP?

Publicly traded and government business entities must follow GAAP accounting procedures to meet regulatory requirements. Privately owned companies do not, but may find that bankers, investors and other stakeholders prefer that reports be generated to GAAP standards. The exception may be a hobby business or a company with a very simple financial basis. In such a case, the extra time and effort of meeting GAAP provisions may be impractical or expensive.

What are the 4 generally accepted accounting principles?

What are the 5 generally accepted accounting principles?