Chapter 2 What is GAAP Accounting?
November 22, 2015
GAAP (Generally Accepted Accounting Principles) is a set of accounting rules and standards that are established and maintained by FASB (Financial Accounting Standards Board). These rules and standards provide a uniform methodology for businesses to follow when assessing and reporting their financial condition. All publicly traded companies are required by Federal Law to report their financial results and status according to the GAAP rules and standards.
I think the best way to understand GAAP Accounting is to contrast it with the most basic accounting system that being Cash Accounting. Cash Accounting assesses an entity's (government, business, or individual) financial status by measuring how income compares to expenditures. If the entity has more income than expenditures it has a profit. If the entity has less income than expenditures it has a loss. Cash Accounting is simple, straight forward and accurate as long as the entity is not making commitments to pay future payments to other people or businesses or similarly is not receiving future payments from other entities. This is where GAAP Accounting becomes important.
If the entity is making promises to make payments to other parties in the future, it must accrue; set aside the money, for these future payments when the entity makes that commitment. This is why GAAP Accounting is often referred to as Accrual Accounting. The entity is accruing the money to pay future obligations. The paying entity does not have to set aside the full amount due at the future date; it just has to set aside the "present value" of these future payments. This means setting aside, say in a trust fund, enough money so that the earned income on that trust fund, when added to the principal that was put into the trust fund, can pay the full obligation when it comes due.
Improper Accounting System
The U.S. Government has been using Cash Accounting to assess and report its financial condition since Fiscal Year 1969 (FY1969) and as a result has not been accruing for the future social benefits that it is promising to pay to U.S. citizens. The U.S. Government has also been spending more than it takes in as income which has created $18.7 Trillion of Debt. The U.S. Government, by not accruing for the social benefit promises it has made, has created $81.1 Trillion of Unfunded Future Liabilities.
This means that the U.S. Government will not be able to pay these social benefit promises which now total $86.3 Trillion. In addition to the $81.1 Trillion of Unfunded Future Liabilities, the U.S. Government has borrowed and spent the $5.2 Trillion that has been paid in to fund the social benefit trust fund.
This means the U.S. citizens and businesses appear to be $99.8 Trillion richer (shown on usdebtclock.org Nov 22, 2015 as US Unfunded Liabilities (GAAP)) because they did not have to pay the taxes required to pay for the Government's overspending of $18.7 Trillion or for the funding of the future social benefit promises of $81.1 Trillion. That is why the U.S. upper class now appears to be so rich.
The difference between these two accounting systems is massive. For the current fiscal year (FY2016) that ends September 30, 2016 the U.S. Government is telling us that we will have a deficit of $0.433 Trillion which is our Cash Accounting Deficit but with proper GAAP Accounting usdebtclock.org Nov 22, 2015 predicts that our GAAP Deficit will be $5.9 Trillion.
Financial data sourced from usdebtclock.org Nov 22, 2015
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