US GAAP or the United States GAAP is a set of accounting principles set by IFCA to monitor and regulate the accounting profession in the United States. These accounting standards apply to all the listed companies to ensure consistency in their treatment for the accounting and presentation of the financial statements. The purpose of the GAAP is to bring consistency in the reporting. So, the users of the financial statements can easily be at use while reading and comparing the financial statements of the different companies.
US GAAP full form
GAAP stands for “Generally Accepted Accounting Principles”
What are the four principles of US GAAP?
Four principles of GAAP include revenue, cost, matching concept, and disclosures for the financial statement. Let’s discuss the details of these principles.
Revenue principle
The revenue principle states that revenue should be recorded in the books of account when it’s earned, irrespective of when the business receives it. In other words, earning revenue is something different from cash receipt of the cash.
To understand the revenue principle, there is a need to understand the difference between accrual and cash-based accounting. An accrual accounting means that revenue earned should be recorded in a period when it has been earned, or related services have been performed.
Cost principle
The cost principle states that an asset should be recorded at its original cost irrespective of the current market value. That’s due to the subjective nature of the market price, as it may be difficult to get market price with accuracy.
Although, there are some exceptions in the application of the cost principles. This principle does not apply to some current assets like debt and equity instruments. Similarly, the principle does not apply to the accounts receivable.
This principle ensures that the companies cannot change the value of the assets. However, US GAAP allows some exceptions, as discussed above.
Matching concept
The matching concept states that related expenses should be recorded in a corresponding period. In simple words, the business must record earned revenue and related expenses in the same accounting period. If the business does not take care of the matching concept, there may be some problems in the report.
US GAAP vs. IFRS
US GAAP and IFRS are accounting standards that FASB and IASB issue, respectively. These standards guide companies to prepare accounting information and present it easily for the reader of the financial statement.
Although there is some difference between these standards but their basic theme and purpose are the same. Let’s discuss some differences between US GAAP and IFRS.
Application OF US GAAP
IFRS is an international financial reporting standard and has been adopted by different countries of the world. On the other hand, US GAAP is limited to the companies and businesses in the United States of America.
Issued by
International Accounting Standard Board-IASB issues IFRS. On the other hand, FASB – Financial Accounting Standard Board issues GAAP. The purpose of issuance of the accounting standards is to monitor an accounting profession.
Principle/rule-based
IFRS is a principle-based framework of accounting. It means companies have some flexibility in their adoption and other matters. On the other hand, GAAP is a rule-based approach without flexibility, and all companies must follow this accounting.
Accepted inventory methods
The IFRS discards LIFO inventory valuation. But, it’s still recognized by the US GAAP. So, in IFRS, FIFO, and AVCO can be followed. On the other hand US, In US GAAP, FIFO, AVCO, and LIFO can be followed.
Further, an amount provided can be reversed in the IFRS. On the contrary, am amount provided under US GAAP cannot be reversed.
Cost/revaluation model
IFRS permits the adoption of a revaluation model, which means the value of the assets can be revised to reflect the current value in the financial statements. On the other hand, GAAP does not permit the fair value, but the only accounting treatment is to keep assets at their original cost.
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