Understanding GAAP Principles

What is GAAP? GAAP Principles

What is GAAP?

The United States Securities and Exchange Commission (SEC) has adopted Generally Accepted Accounting Principles (GAAP) as a way of creating transparent and standardized financial reporting for public companies. GAAP is composed of a set of rules that dictate the manner in which financials should be recorded and reported. The benefits of GAAP are that it allows companies and investors to evaluate and gain insight into a company based on standard financial statements.

GAAP Principles

While there are multiple principles, we will focus on Deacom’s best practices for the following four:

1. Recognition Principle - A company should record both revenues and expenses when the transaction has been performed, instead of waiting until the cash is received.
   • Best Practices in Deacom
     • Deacom automatically recognized Cost of Goods Sold when the materials have been shipped in the system.
       • Shipping can be performed real time using the Deacom Warehouse Management System (WMS).
     • Revenue will be automatically recognized when generating the invoice in Deacom.
       • There is an option to Invoice for the Ship Date or to automatically invoice when shipping.
     • Progress billings allow you to match revenue and expense in same period of when a service or material delivery has been completed.
2. Full Disclosure Principle - Companies must have full disclosure where their financials are correct and open to the public. There must be no intentionally hidden information.
   • Best Practices in Deacom
     • Financial Statements can be created and customized to represent the pertinent accounts and groupings for the company in Deacom.
       • These can also be printed for record.
     • A footer can be added to the financial statement printout for a disclosure statement.
3. Matching Principle - Companies must report an expense and its corresponding revenue in the same financial period. In order to accomplish this an accrual basis of accounting and adjusted entries should be used.
   • Best Practices in Deacom
     • When invoicing orders, choose to use the Ship Date as Invoice Date option for the revenue and cost of goods sold to post on the same day.
     • Invoice at the end of the day for everything that has shipped for the day.
     • WMS allows you to ship real time so that invoicing can take place immediately after.
     • Use actual labor tracking to post payroll for the week it was incurred.
4. Historical Cost Principle - Goods, services and capital assets should be represented on the balance sheet at their historical purchase price. They should not be revalued based on fluctuations in market value.
   • Best Practices in Deacom
     • A purchase order can be placed to represent the value of the material, service or capital asset when it is purchased.
       • The Purchase To account on the Purchase Order Line can be used to represent the balance sheet account it will be debited into when receiving.
         • An asset account can be specified as the Purchase To account.
     • Journal entries can be used to record the value of the material, service or capital asset on the balance sheet instead of placing a purchase order, if preferred.
     • The system will not automatically revalue any inventory, service or capital asset.
     • The invoice for the purchase can be attached to the Purchase Order transaction for verification that it was entered correctly.
     • Work flow can be added to purchase orders for a verification process.