Generally Accepted Accounting Principles (GAAPs)

Generally accepted accounting principles (GAAPs) are used by accountants and organizations as a guiding framework to formulate financial statements. Each country has its own set of GAAPs; however, there is a push toward harmonizing these various national GAAP systems into one international GAAP regime. In the United States, in the past, these principles were developed from best industry practices; however, now GAAPs are promulgated by authoritative bodies such as the Financial Accounting Standards Board (FASB). The FASB is an independent body that formulates the new accounting rules (for example, statements) that are to be adhered to by the accounting profession and practicing health care accountants. Other institutions have issued accounting guidelines over the years, and therefore there are different sources of GAAPs, collectively referred to as the GAAP hierarchy. It is important for health care accounting practitioners to understand the different levels of the GAAP hierarchy.

GAAPs are not “black and white” rules that define what should be done in every conceivable situation but rather guideline sets (or frameworks) to determine what is the proper treatment of an organizational transaction. In fact, GAAPs usually provide different options practitioners can use and still conform. For example, GAAPs allow a number of different ways for organizations to properly depreciate assets (for example, straight-line methods, accelerated methods, and so on). The same is true for inventory valuations, for example, last in, first out (LIFO); first in, first out (FIFO), and so on. The purpose of these alternatives is to give organizations the opportunity to choose the reporting option that best reflects the economic reality of the underlying transactions.