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GAAP codification 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 codification is to aid in standardizing the breakdown of categories and sub-categories used in the business accounting process. Using GAAP codification as the basis for maintaining company financial records can aid in simplifying the reconciliation process internally while also making it easier to provide the data necessary to conduct a financial audit.
The general idea behind GAAP codification is to minimize the range of sometimes convoluted and confusing standards employed in the past by providing a basic template of how to create and manage categories and sub-categories within a set of accounting books. In general, this type of codification can aid a small business owner in setting up a viable accounting system that will function well even if the company expands rapidly. The terminology is also somewhat more friendly for those who do not have extensive backgrounds in accounting policies and procedures, making it much easier to train employees to manage various payables and receivables functions.
The basic approach of the GAAP codification involves a four-layered approach that includes a topic, sub-topic, a section, and a paragraph. This hierarchical arrangement makes it possible to follow a logical sequence in order to provide all the data necessary about a post or entry into the accounting records. The arrangement makes it much easier to relate the postings with the backup documentation that supports those entries, a benefit that can be especially helpful when it comes to performing accounting reconciliations internally. This approach can also simplify the process of undergoing an audit by a third party, since the process makes it easier to identify posting errors and any other discrepancies that may be found during the course of the audit.
Along with the inclusion of a chain of structure beginning with a topic and ending with a describing paragraph, GAAP codification also helps to define the categories used for tracking assets and liabilities. Categories such as assets, liabilities, equity, revenue, expenses and broad transactions are included in the listing of recommended categories. Companies may utilize all or only a portion of the recommended categories, depending on the nature of the business operation. In addition, GAAP codification also allows for the establishment of an industry category, making it all the easier to adapt the use of the codification to a business connected with any type of industry classification.