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GAAP coding simplifies accounting by establishing standard coding processes based on generally accepted accounting principles. It involves a four-layer approach and defines categories for tracking assets and liabilities, making it easier to reconcile and audit financial records.
GAAP coding is a process that involves establishing standard coding processes based on generally accepted accounting principles. Introduced in the first decade of the 21st century by the Financial Accounting Standards Board (FASB), the purpose of the coding is to help standardize the breakdown of categories and subcategories used in the business accounting process. Using GAAP coding as the basis for maintaining company financial records can help simplify the reconciliation process internally while making it easier to provide the data needed to perform a financial audit.
The general idea behind GAAP coding is to minimize the range of sometimes complicated and confusing standards employed in the past by providing a basic template for how to create and manage categories and subcategories within a set of ledgers. In general, this type of coding can help a small business owner establish a workable accounting system that works well even as the business expands rapidly. The terminology is also somewhat friendlier to those without extensive experience in accounting policies and procedures, making it much easier to train employees to manage various accounts payable and receivable functions.
The basic approach to GAAP coding involves a four-layer approach that includes a topic, subtopic, section, and paragraph. This hierarchical arrangement allows a logical sequence to be followed to provide all the necessary data about a publication or entry in the accounting records. The arrangement makes it much easier to match postings to the supporting documentation that supports those entries, a benefit that can be especially helpful when trying to perform accounting reconciliations internally. This approach can also simplify the process of undergoing a third-party audit, as the process makes it easier to identify publication errors and any other discrepancies that may be found during the course of the audit.
Along with including a structure string that begins with a subject and ends with a descriptive paragraph, GAAP coding also helps define the categories used to track assets and liabilities. Categories like assets, liabilities, equity, income, expenses, and general transactions are included in the list of recommended categories. Businesses may use all or only a portion of the recommended categories, depending on the nature of the business operation. In addition, GAAP coding also allows for the establishment of an industry category, which makes it easier to tailor the use of the coding to a business related to any type of industry classification.
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