Practical Accounting Procedures

Detailed explanation of Practical Accounting Procedures based on official information from FASB・SEC. Business Type Selection & Formation

Published: January 12, 2026

Practical Accounting Procedures in the United States

1. Overview

Practical accounting procedures refer to the standardized, day-to-day methods and processes used by businesses and accounting professionals to record, classify, summarize, and report financial transactions. In the United States, these procedures are not arbitrary; they are fundamentally shaped by a framework of established standards and regulations. The primary guiding principles are the Generally Accepted Accounting Principles (GAAP), established by the Financial Accounting Standards Board (FASB), and for publicly traded companies, the regulations enforced by the Securities and Exchange Commission (SEC).

The importance of rigorous accounting procedures cannot be overstated. They ensure:

  • Accuracy and Reliability: Financial statements accurately reflect a company's financial position and performance.
  • Regulatory Compliance: Adherence to GAAP and SEC rules avoids legal penalties and sanctions.
  • Informed Decision-Making: Management, investors, and creditors rely on consistent financial data for strategic choices.
  • Audit Readiness: Proper procedures facilitate efficient internal and external audits.
  • Tax Compliance: Accurate books are essential for correct federal and state tax filings with the Internal Revenue Service (IRS).

2. Applicable Objects & Scenarios

Practical accounting procedures apply to virtually all economic entities operating in the U.S., though complexity varies.

  • Public Companies: Must follow GAAP and adhere to strict SEC reporting requirements (e.g., 10-K, 10-Q).
  • Private Companies: While not legally required to follow GAAP for public reporting, most do for credibility, especially when seeking loans or investment. Many lenders require GAAP-compliant financials.
  • Small Businesses & Sole Proprietors: Must maintain accurate records for tax purposes (IRS requirements) and sound financial management, even if using a simpler cash-basis method.
  • Non-Profit Organizations: Follow specific accounting standards (set by FASB) but still require disciplined procedures for fund accounting and grant reporting.
  • Accounting Professionals & Firms: CPA firms audit, review, and compile financial statements, ensuring procedures align with standards.

These procedures are needed continuously for daily bookkeeping, at monthly and quarterly closing periods, for annual financial reporting, and during tax preparation season.

3. Core Conclusions

  • U.S. accounting is governed by a dual system: GAAP for accounting principles and the SEC for regulatory enforcement for public companies.
  • The accrual basis of accounting (recording revenues when earned and expenses when incurred) is required under GAAP for most substantive businesses, providing a more accurate financial picture than the cash basis.
  • Internal controls, such as segregation of duties and reconciliation processes, are a critical component of practical procedures to prevent errors and fraud.
  • Technology, including accounting software and cloud-based systems, is integral to modern accounting procedures, but the underlying principles and controls remain paramount.
  • Professional judgment is often required in applying accounting standards to complex transactions (e.g., revenue recognition, lease accounting).

4. Procedures & Steps

A standard monthly accounting cycle illustrates core practical procedures.

Step 1: Preparation & Daily/Monthly Recording

  • Transaction Documentation: Collect and verify source documents (invoices, receipts, bank statements, payroll records).
  • Journal Entries: Record transactions in the general journal using double-entry bookkeeping (debits and credits). This includes standard entries for sales, purchases, payroll, and adjusting entries for accruals and deferrals.
  • Posting to Ledger: Transfer journal entry details to the appropriate general ledger accounts (e.g., Cash, Accounts Receivable, Revenue).
  • Bank Reconciliation: Reconcile the cash balance in the company's books with the monthly bank statement to identify discrepancies.

Step 2: Application & Submission (Period-End)

  • Trial Balance: Prepare an unadjusted trial balance to ensure total debits equal total credits.
  • Adjusting Entries: Make necessary adjusting entries for:
    • Accrued revenues/expenses (earned/incurred but not yet recorded).
    • Deferred revenues/expenses (cash received/paid before being earned/incurred).
    • Depreciation and amortization.
    • Inventory adjustments.
  • Adjusted Trial Balance: Prepare a new trial balance after adjustments.
  • Financial Statement Preparation: Use the adjusted trial balance to generate the core statements:
    • Income Statement (Profit & Loss)
    • Balance Sheet
    • Statement of Cash Flows
    • Statement of Owner's Equity

Step 3: Review & Confirmation

  • Internal Review: Management reviews financial statements for reasonableness and accuracy.
  • Closing Entries: For companies using the accrual basis, temporary accounts (revenues, expenses, dividends) are closed to retained earnings to prepare for the next accounting period.
  • Post-Closing Trial Balance: Verify that only permanent balance sheet accounts remain with balanced debits and credits.
  • External Audit/Review (if applicable): An independent CPA firm may perform an audit, review, or compilation, providing assurance on the financial statements.
  • Filing & Reporting: Submit financial reports to required parties (e.g., SEC filings, tax authorities, lenders, investors).

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between GAAP and IRS tax accounting rules? A: GAAP aims to present a fair and consistent view of financial performance to investors. IRS rules (Tax Code) are designed to collect tax revenue and may include different deductions, credits, and timing rules. Companies often maintain two sets of books: one for financial reporting (GAAP) and one for tax purposes.

Q2: Is accounting software sufficient for compliance? A: Software is a tool that automates processes, but it does not guarantee compliance. The company is responsible for setting up the software correctly (e.g., chart of accounts, controls), entering accurate data, understanding the output, and applying correct accounting principles.

Q3: When is a private company required to have an audit? A: There is no federal requirement for private companies to be audited. However, banks, investors, or potential buyers often require an audit as a condition for lending or investment. Some state laws or specific industry regulations may also mandate audits.

Q4: What are the key internal controls for a small business? A: Essential controls include: segregation of duties (where possible), requiring authorization for significant transactions, regular bank reconciliations performed by someone not involved in cash receipt/disbursement, and periodic review of financial reports by the owner.

Q5: How do I choose between cash-basis and accrual-basis accounting? A: The IRS generally allows small businesses (under a certain gross receipts threshold) to use the cash method. However, GAAP requires the accrual method. If you plan to seek significant financing, grow, or sell your business, accrual basis is strongly recommended. Please verify specific gross receipt thresholds with official sources.

Q6: Where can I find the specific GAAP standards? A: The official GAAP standards (Accounting Standards Codification) are published and maintained by the Financial Accounting Standards Board (FASB). Access requires a subscription.

6. Risks & Compliance

  • Disclaimer: This article provides general guidance on accounting procedures and is not a substitute for professional accounting, legal, or tax advice. Business owners should consult with a qualified Certified Public Accountant (CPA).
  • Non-Compliance Risks: Failure to follow proper procedures can lead to inaccurate financial statements, poor business decisions, IRS penalties and interest for incorrect tax filings, loan covenant violations, and, for public companies, severe SEC enforcement actions including fines.
  • Fraud Risk: Weak internal controls and inadequate procedures significantly increase the risk of asset misappropriation and financial statement fraud.
  • Changing Standards: Accounting standards (e.g., revenue recognition, lease accounting) are updated periodically. Businesses must stay informed or work with a professional to implement new standards.

7. References & Sources

8. Related Topics

  • Internal Controls & Fraud Prevention
  • Financial Statement Analysis
  • U.S. Federal Tax Filing Procedures for Businesses
  • Audit and Assurance Services
  • Small Business Bookkeeping Basics
  • Revenue Recognition Standards (ASC 606)
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