Accounting Gapp, or \"Generally Accepted Accounting Principles,\"

Accounting

GAPP, or "generally accepted accounting principles," has very specific meanings for the accounting profession. Like many other fields, these are best practice principles, and they both govern the standards of accountants and guide in licensing. They were designed so that there was a more even playing field, level of transparency, and trust in the accounting industry (see, for example, www.fasab.gov/accepted.html). While not always absolutes, these types of guidelines are a template for the way in which CPAs and accounting processionals work through documents, report figures, and are responsible for the manner in which information is disclosed (for more, review the site AICPA, at www.aicpa.org). There are two different ways to look at accounting data, according to GAPP: accrual or cash.

Cash Method- Cash accounting (receipts and disbursements) is a way of recording revenue when cash is received and recording expenses when they are paid. There are some advantages in using this method because payment of expenses may be accelerated before year end, which maximizes deductions and billings can be postponed; causing the IRS to discourage this form of accounting for tax purposes (Whittenburg, 2010). The fundamental premise of cash accounting is that the event is recorded when it happens -- money received, money spent and technically should reflect a snapshot of the company at that very moment in time.

Accrual Method- The accrual method records incidents when they are earned or when expenses are incurred. It is a way to measure the performance and position of any organization by focusing of the timing of the event rather than when cash is used to pay or received. It uses a matching principle that matches revenues to expenses so that cash inflow/outlow can be combined at the present time with future in/out to give a more complete picture of the organization's actual fiscal health. Thus, for many it is considered to be the standard accounting practice, the exception being extremely small companies. This is because the accrual is more than just a snapshot of cash, it is a picture of the organization (Accrual Accounting, 2012).

Analysis -- The decision on the accounting method is important because it may have a very real and major impact on the way organizations report revenue and expenses, tax liability, and what happens to revenue -- particularly in the calculation of profit or loss. In cash based accounting, for instance, expenses and revenues are not matched on a month-to-month basis. Expenses are not recognized or recorded until the money is paid out -- even if those expenses were incurred for the organization in previous months. Revenues, too, earned at any time, are not recorded until the company is paid, regardless of when the job was finished. Cash based accounting tracks the actual cash flow of the business. Using the accrual method, however, both expenses and revenues are matched, which lets a company know how much it is spending on a monthly basis just to operate and what kinds of profits are flowing in, or not. Expenses are recorded in the month the happen, even if cash is not paid out for several months. Revenues are recorded when the sale is complete or product shipped, even if the organization has yet to receive money from the client (Stickney, et.al., 2010).