When financial statements will be used by individuals outside of the company, the financial statements must follow generally accepted accounting principles (GAAP). GAAP are common rules or standards developed by the Financial Accounting Standards Board (FASB). The rules are based on basic accounting principles and concepts such as cost, matching, full disclosure, going concern, consistency, and more.
GAAP requires large corporations to use the accrual basis of accounting. This means that revenues are reported when they are earned (not when the money is received), and expenses are reported when they are incurred (not when paid).
If a U.S. corporation's stock is publicly traded, it must follow the reporting requirements of the Securities and Exchange Commission (SEC), an agency of the U.S. government. This means the corporation's financial statements must be audited by an independent registered public accounting firm. The corporation must also provide additional financial reporting such as annual reports to stockholders and to the SEC (Form 10-K), proxy statements, and other financial information.
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Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. Read more about the author.