GAAP

Your accounting department prepares daily reports and follows specific protocol in counting beans. Every single company in every industry follow the same assumptions, principles, and constraints, or the auditors send the Board of the company A Naughty Letter (Deficiencies Letter).

From a very basic purview, consider the rules, codes of conduct and principles when playing a game of baseball. There are things you do and don’t do. Any team across the country, no matter the skill level, must follow the same rules, standards, and conduct.

Companies run in similar form. There are rules, accounting principles, standards, procedures and protocol that companies must follow when completing a financial statement. Just as the MLB puts together rules and regulations such as salary caps, industry boards put together rules and regulations that financial gurus must follow when they do their jobs. Learning these rules can be a pain, but they're the same for every company, so once you learn them and move to a different industry, the principles remain the same.

GAAP: Generally. Accepted. Accounting. Principles. There are lots of ways that clever bean counters could define and or account for the notion of profits. Lots of ways to recognize revenues…versus sales. Lots of ways to think about how much that 10 Commandment frisbee factory is depreciating in value each year.

Well, the World According to GAAP outlines the structure under which accountants must count beans. The basic idea? Sort of in the vein of the golden rule...that is, do unto others as you’d have them do unto you. GAAP requires that accountants always present their numbers in the most reasonably conservative manner possible, such that they never overstate how profitable or well the company is doing.

GAAP is the framework; the map. And the destinations we want to go inside this neck of the accounting woods are these three:

· Income Statement
· Cash Flow Statement
· Balance Sheet

None of these three key elements means anything, however, unless they all follow the same rules. They are linked like gears in an overpriced swiss watch. And the 18 zillion individual rules on their own…mean nothing.

Like…"what is a revenue?" Is it a dollar you collect in cash at a video game arcade booth? Is it the promise to pay that dollar in a year? Lots of ways to account for this notion of revenue, so don't think of GAAP as a series of rules…rather, think of it as a religion. It's all about "doing right," and part of that is a natural conservatism.

That is, if you are thinking about how to account for $5 promised to you in a year, you have to recognize that there is risk you won't collect it…and that money a year from now is worth less than its face value, and that you should categorize those revenues differently from how you'd categorize collecting that 5-dollar bill in cash that day.

GAAP is basically The Force in accounting. May it be with you.