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The business reports financials in a stable, consistent unit of currency. The business will operate indefinitely, independent of any person. The business must remain separate from its owners and stakeholders. These assumptions are present across all company filings. These are universal assumptions every business makes as it reports its financial information. Companies need to disclose information within context. Expenses match revenues within the same period. Companies record transactions at origination. Companies report assets and liabilities acquisition costs.

They’re universally recognized as the core, fundamental pillars of Generally Accepted Accounting Principles and its practices. These are the principles that govern the GAAP framework. These rules are the governing basis for Generally Accepted Accounting Principles and apply universally to all companies. To understand the fundamental function and execution of GAAP, it’s important to review the principles, assumptions and constraints of the framework. A famous example of this occurred in 2019, when the SEC fined car rental company Hertz (OTCMKTS: HTZZ) $16 million for reporting non-GAAP figures. This can include fining companies that fail to disclose financial records in accordance with GAAP. Once established, the SEC enforces Generally Accepted Accounting Principles standards for all public companies. The SEC can also set accounting standards, codifying them as part of GAAP in cooperation with FASB. It reviews these standards annually and updates them via Accounting Standards Codification. As an impartial, independent, non-government entity, FASB sets the standards for Generally Accepted Accounting Principles. It’s the duty of two organizations to establish and enforce GAAP standards: the Financial Accounting Standards Board (FASB) and Securities and Exchange Commission (SEC). It’s beneficial to companies and shareholders alike. GAAP reporting shows a willingness to adhere to universally accepted accounting standards. It’s mandated by the Securities and Exchange Commission (SEC) for all public companies, and good practice even for private companies. GAAP-compliance is a major implication for companies reporting financial information to shareholders. In short: GAAP standardizes accounting for all companies, so the data they’re reporting is universally understood and cross-comparable. GAAP represents methods, rules and practices that provide guidelines and procedures-as well as objective standards-for financial data and statements. That’s where Generally Accepted Accounting Principles (GAAP) come in. To ensure this, it’s paramount to have a baseline for reporting. When a public company issues a financial statement, everything needs to be clear and well-understood by everyone reading it.