What is GAAP Accounting?
Apr 24, 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 these 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. 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 receiving future payments from others.
This is where GAAP Accounting becomes important. If the entity is making promises to make payments to other parties at some point 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 $18.1 Trillion of Debt. The U.S. Government has not been accruing for the social benefit promises it has made which has created $83.3 Trillion of Unfunded Liabilities.
This means that the U.S. Government will not be able to pay these social benefit promises which now total $88.3 Trillion. In addition to the $83.3 Trillion of Unfunded Liabilities, the U.S. Government has borrowed and spent $5.0 Trillion that has been paid in to fund the social benefit trust fund.
This means the U.S. Citizens and businesses appear to be $101.4 Trillion richer because they did not have to pay the taxes required to pay for the Government's overspending of $18.1 Trillion or the funding of the social benefit promises of $83.3 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 (FY2015) the U.S. Government is telling us that we will have a deficit of $0.5 Trillion which is our Cash Accounting Deficit but with proper GAAP Accounting my model (USAPonzi Fiscal Model) predicts that our GAAP Deficit will be $6.5 Trillion and www.usdebtclock.org predicts that it will be $5.6 Trillion. These are both estimates but the major difference is likely in the assumed rate of interest income on the accrued funds in the set aside trust fund for social benefits as described above.