Become familiar with the industry benchmarks for the companies you wish to evaluate. Close, but no Khaki. GAAP stands for Generally Accepted Accounting Principles, which is a set of rules for accounting that determines how financial information must be presented in financial statements. GAAP ensures that we're all speaking the same language when looking over the numbers. Accrual Accounting One of the main principles of GAAP is Accrual Accounting.
Most businesses report earnings using the accrual principle of accounting.
This means that sales revenues and related expenses are recorded when they are earned and incurred whether or not cash has been received or paid. Accrual-basis accounting includes credit sales in the revenue line on the income statement and records them as accounts receivable in the balance sheet. Similarly, both paid and unpaid expenses are recorded as expenses on the income statement. Accrual accounting results in the best measure of a firm's profitability and allows a fair comparison with previous periods. With accrual accounting comes Accrued Interest Expense.