Many small business government contractors are exempt from complying with cost accounting standards (CAS) and defined by the code of federal regulations (CFR).  However, compliance with generally accepted accounting principles (GAAP) is required.  What exactly is GAAP?

GAAP are a set of accounting principles established by the Financial Accounting Standards Board (FASB) to provide clarity, consistency, and comparability of financial reporting and information.  All publicly traded companies are required to follow GAAP.  Privately held companies may choose a non-GAAP reporting method, but when working with the federal government and the Defense Contract Auditing Agency (DCAA) GAAP must be followed.  There is no complete set of principles since different industries must report financial data differently.

While industry specific best practices can be included as GAAP, there are some basic (and most common) principles in GAAP.  These should be integrated in any federal contractors accounting policies.

1. Accrual Basis Accounting - Transactions are accrued when earned/incurred rather than when cash is received/spent

   1. Matching Principle – income and expense pertaining to the same operations should be included in the same time period

   2. Revenue Recognition – revenue is earned and recognized upon completion rather than the timing of cashflow

   3. Cost Principles – assets are recorded at cost, not market value

2. Economic Entity – separate financial records are kept for different entities

3. Monetary Unit – financial records include only quantifiable data

4. Full Disclosure – any information (such as lawsuits or bankruptcy) that could have a significant affect on an entity’s financial position should be disclosed

5. Conservatism/Prudence – the least optimistic estimate will be used

6. Regularity – established rules and regulations are followed

7. Consistency – consistent standards are applied

8. Sincerity – financial reporting will be accurate and impartial

9. Permanence of methods – consistent procedures are used

10. Non-compensation – ALL factors pertaining to performance are reported regardless of the indications of positive or negative performance

11. Continuity/Going Concern – assumption that an organization will continue operations

12. Periodicity – reporting is divided into accounting periods such as months, quarters, and/or fiscal years

13. Materiality – when information will have no significant effect on end users, it may be ignored

14. Good Faith – assumption that all parties are acting with honesty and integrity