A guide to accounts payable in Generally Accepted Accounting Principles (GAAP)

Globally, businesses are embracing digitalisation to grow their operations and maintain business continuity. This is particularly true for a complex ongoing process like accounts payable. Accounts payable automation results in enhanced productivity, decreased costs, and better supplier relationships, and leads to 45% improvement in efficiency. Additionally, adherence to the Generally Accepted Accounting Principles (GAAP) becomes crucial to ensure accurate dissemination of financial data and compliance.

Understanding the best practices and regulatory requirements associated with GAAP will enable your business to improve its accounting processes, create relevant, clear, and accurate financial data, and remain in compliance with the law.

GAAP (generally accepted accounting principles)

GAAP consists of a set of guidelines, standards, and rules that companies use to prepare and present their financial statements. It is based on a set of principles and standards defined for uniform financial reporting.

The goal of GAAP is to ensure transparent and consistent financial reporting by companies that declare their financial results to the public. They act as a guideline for creating financial statements like income statements, balance sheets, and cash flow statements.

Principles included in GAAP

Generally Accepted Accounting Principles (GAAP) are framed and regulated by the Financial Accounting Standards Board (FASB), a private standard-setting body. At the same time, the enforcement is carried out by the Securities Exchange Commission (SEC). GAAP includes a wide range of subjects, of which the ten principles create a broad framework for businesses to carry out their accounting processes, including:

  • Regularity:

    Businesses adopting GAAP must follow all the specified rules and regulations.

  • Consistency:

    Companies will apply the same accounting standards across the entire process. Any change in the methods of reporting must be fully disclosed.

  • Sincerity:

    Businesses must provide an accurate and impartial account of finances

  • Permanence of methods:

    All financial reports should use consistent techniques so that observers can make comparisons more readily.

  • Non-compensation:

    Accountants must give total transparency of positive and negative reports. In other words, they are not compensated depending on the quality of their reporting.

  • Prudence:

    Businesses should base their financial data on facts, not on speculation.

  • Continuity:

    Asset valuation is based on the assumption that the business operations shall continue.

  • Periodicity:

    Businesses shall produce their financial records on a regular basis, such as quarterly.

  • Materiality:

    Accountants shall report all facts that may be significant for an investor, such as the debt the business carries.

  • Utmost good faith:

    All parties are expected and assumed to be honest in their collection and reporting of all financial data.

These ten principles distinguish between business activities and their owners’ personal transactions. They include known best practices for cost, transparency, matching, revenue recognition, professional discretion, and conservatism.
Additionally, GAAP lays down four major rules and standards for businesses to follow for their accounting process. All public companies are required to comply with these accounting standards.

  • Accrual accounting methods:

    Accrual accounting principle enters an income when a service or product is sold but not when payment is received; direct expenditures for items sold are recorded at the time of sale, and indirect expenses are reported when expenses are paid. This leads to the complex function of the accounts payable department to ensure the financial data is accurately reported.

  • Depreciation and capital expenditures:

    Depreciation and amortization on assets have to be tracked and recorded throughout the asset’s life.

  • Reporting of historical costs:

    Assets like property, equipment, and facilities are valued at the purchase price and not at the current market value.

  • Bad debts reporting:

    Businesses with high accounts receivables must report the possibility of some becoming unrecoverable and reported as bad debts.

How automation can help in compliance with GAAP rules for accounts payable

Today, intelligent accounting software makes it simpler for businesses to use this framework. Accounts payable process automation ensures continued compliance with GAAP and other accounting rules.

  • Reconciliation of accounts:

    Compliance-bound, time-consuming processes like reconciliation are error-prone when done manually. Further, GAAP guidelines state that consistency of methods is necessary to ensure compliance with the accounting standards.

  • Data processing:

    Smoother invoice processing using AI and ML-led automation can help reduce errors and give a clear picture of the accounts payable situation of a business.

  • Timely reporting:

    GAAP rules require accurate and timely reporting of P&L and other financial data. With automation, the problems of erroneous data are quickly eliminated.

How can Infosys BPM help?

Infosys BPM brings a future-proof Accounts Payable on the Cloud service, which transforms your invoice processing. It creates a seamless process to improve efficiency through time and cost savings. Our end-to-end accounts payable function can configure an automated AP workflow based on business needs while providing an AP Cockpit for ready analytics.

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