Accounting is often thought of as this dry profession that we only need to consider around tax time, but if you are an investor, understanding how accounting works on a basic level is important if you are going to analyze businesses on any level. GAAP accounting rules are the primary force behind financial accounting, and today we will learn more about this exciting topic!
I took several semesters of accounting in college, and to be frank, I don’t recall much about the classes except for the pretty girl that sat in the desk right in front of me. In hindsight, I wish that I had paid more attention to the teacher as it would have come in handy in my investing life.
Part of becoming a better investor is understanding the business that you want to buy, and part of learning that business is understanding the language that business speaks, which is financial accounting. Part of understanding that language is having a foundation in GAAP accounting and the rules surrounding GAAP.
Buffett and Munger both have strong opinions on the understanding of businesses and the language of business, which is accounting.
“You need to know how figures are put together, but also have to bring something else. Read a lot of business articles and annual reports. If I don’t understand it, it’s probably because the management doesn’t want me to understand it. And if that’s the case, usually there’s something wrong.”
“Asking Warren what good books he knows about accounting is like asking him what good books he has on breathing. You start with basic rules of bookkeeping, and then you have to spend a lot of time to really become knowledgeable.”
Topics we will discuss in today’s post:
- What is GAAP Accounting?
- What are the Four Principles of GAAP?
- Compliance with GAAP
- GAAP versus Non-GAAP: What’s the Difference?
- GAAP versus IRFS
Ok, let’s dive in and learn more about GAAP accounting rules.[continue reading…]