10 GAAP principles: What Are They and Why Do They Matter?

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What Are the 10 GAAP Principles? (And How Do They Apply to Church Accounting?)

There are many ways accountants can do their jobs. For instance, general accounting is great for businesses, whereas fund accounting is more suited to church financial management.

As accountants tend to handle tasks like taxes, budgets, and payroll, it’s helpful (and at times required) for them to stick to certain standards and rules. One of the most famous of these is the GAAP principles. 

Below is a brief description of these foundational accounting guidelines, as well as the 10 GAAP principles listed in order, along with brief definitions.

What Does GAAP Mean, and Where Did It Come From?

The term GAAP means “Generally Accepted Accounting Principles.” These principles provide a standardized element to accounting across all businesses. It codifies terminology, definitions of those terms, and accounting methodologies. 

This makes it easier to provide transparent financial reporting. Financial consultants can also make assumptions based on those reports, and analysts can compare and contrast financial activity from one organization to the next. This is true regardless of whether this takes place in a building with a warehouse or one with a sanctuary.

GAAP principles are formalized, published, and updated by the Financial Accounting Standards Board (FASB). This group and its standards set the accounting tone in the United States. However, they aren’t universal. In fact, around the world, the International Financial Reporting Standards (IFRS) are more commonly utilized. Nevertheless, American companies of all sizes and from all industries recognize GAAP standards and requirements as part of doing business in the U.S.A.

The American Institute of Accountants (AIA) initially began developing GAAP and used the terminology for the first time back in 1936. This was in the wake of the Stock Market Crash. That disaster created the Great Depression and was partly due to inconsistent and unethical accounting behavior from major businesses. Since then, GAAP has continued to guide American accountants right into the 21st century.

What Are the 10 GAAP Principles?

The GAAP accounting framework centers on 10 key principles. Here they are, along with a brief explanation of each one:

  1. The Principle of Regularity: This is the concept that all GAAP-compliant accountants and their organizations will adhere to the established and recognized rules and regulations.
  2. The Principle of Consistency: Over time, the accounting methods, activities, and reporting standards applied by an organization or professional must remain consistent.
  3. The Principle of Sincerity: Organizations and accountants must always depict reports and data correctly with appropriate accuracy and clear impartiality.
  4. The Principle of Permanence of Methods: The processes and procedures involved in preparing financial reports must remain constant over time.
  5. The Principle of Non-Compensation: When reporting on an organization’s performance, all positive and negative financial aspects will be fully relayed with no prospect of debt compensation.
  6. The Principle of Prudence: Accounting activity must take place in a timely manner, be realistic, and not be influenced by speculation.
  7. The Principle of Continuity: The way accountants report both short- and long-term asset valuations and classifications must assume the organization will continue to operate.
  8. The Principle of Periodicity: Accounting periods and reporting must take place at a consistent, routine frequency, such as a fiscal quarter or a fiscal year.
  9. The Principle of Materiality: All reports must be truthful, transparent, and fully disclose important data and information as it pertains to an organization’s financial status.
  10. The Principle of Utmost Good Faith: Everyone involved in the accounting process must act honestly to their utmost capabilities.

The ten principles listed above are just a part of the GAAP framework. However, they are the central guiding elements from which the rest of the standards and requirements derive. They provide a clear, easy-to-follow path that accountants can use as they manage money, make financial decisions, and report related data on a regular basis.

GAAP Principles and Church Accounting

At Chaney & Associates, we specialize in operating as the accounting firm for the church. In this context, that emphasis naturally leads to the follow-up question: how do GAAP principles influence church accounting?

The first thing worth pointing out here is that technically speaking, churches aren’t required to follow GAAP guidelines. Only certain government organizations and larger corporations must follow them by law.

Non-profits don’t have to follow these rules unless their own governmental boards mandate it. However, some churches choose to follow these standards as an effective way to maintain healthy, consistent, and transparent accounting practices. When you work with a Christian CPA (certified public accountant), like our team of experts at Chaney & Associates, you naturally integrate GAAP principles into your church’s accounting activity.

Using GAAP Principles to Improve Your Ministry’s Finances

One of the best things about the 10 GAAP principles is that they don’t consist of unreasonable expectations or industry-specific requirements. They are generic, easily applicable, and ethically sound guidelines. They set the standard for consistent, high-quality accounting activity.

GAAP principles are important. However, implementing them can be a complicated and intensive process, even in a church setting. That’s where working with a third-party accounting solution can make things easier. If you’re trying to follow GAAP protocols, reach out, and our team can begin to help you align your church with a new standard of accounting excellence.

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