GAAP is a collection of guidelines, principles and rules that are used to value the financial statements of a company. The key theme is that the company will continue to operate for several years into the future. This is in contrast to Statutory Accounting Principles (SAP), which assumes the company is going to cease operations and be liquidated right away.
Examples of how GAAP applies:
- If the company has accounts receivable that are fairly old (say, 150 days), under GAAP, if the company believes it will be paid eventually, then the accounts receivable is treated as a valid asset. Under SAP, once the accounts receivable is older than 90 days, the accounts receivable is "written off", and the assets of the company decrease by the amount of this bad debt.
Examples of how GAAP applies:
- If the company has accounts receivable that are fairly old (say, 150 days), under GAAP, if the company believes it will be paid eventually, then the accounts receivable is treated as a valid asset. Under SAP, once the accounts receivable is older than 90 days, the accounts receivable is "written off", and the assets of the company decrease by the amount of this bad debt.