Generally Accepted Accounting Principles (GAAP) is a set of accounting principles, standards and procedures that organizations use to compile their financial statements. GAAP is a collection of authoritative standards set by policy boards such as the Financial Accounting Standards Board (FASB) or the Governmental Accounting Standards Board (GASB).
GASB is responsible for setting accounting standards for state and local governments and their governmental agencies, while FASB is responsible for setting accounting standards for all other organizations, including nongovernmental, nonprofit organizations like hospitals and private universities. GASB specifies different methods of accounting for governmental funds, proprietary funds, and government-wide financial statements. GASB prescribes an accrual basis of accounting for Government-Wide Financial Statements and for Proprietary Fund Statements. Financial Statements for Governmental Funds are prescribed to use a modified accrual basis of accounting. FASB prescribes an accrual basis accounting method for organizations that follow FASB guidelines.
Although FASB and GASB prescribe certain accounting basis, not all organizations follow the standards set by these policy boards. Organizations that depart from the prescribed accounting basis may do so because a state agency has accounting standards and regulations with which the organization must comply. We will be addressing the different types of accounting bases in future Merritt Footnotes.