What is GAAP?

Generally Accepted Accounting Principles (GAAP) is the standard framework of rules used to produce accurate and impartial financial statements and reports. GAAP is the guideline that businesses use to prepare reports that the investors, creditors, and other stakeholders can rely on when making important decisions. GAAP forms the basis for the consistency and reliability of financial statements of companies across industries.

History of GAAP

GAAP is a set of principles that have developed over time based on accepted practices in the accounting profession. The implementation of GAAP began in the nineteenth century and was led by organizations that served to standardize the field of accounting. In the 1930s, the American Institute of Certified Public Accountants (AICPA) created a committee to develop and create accounting standards known as the Committee on Accounting Procedure (CAP). The CAP was responsible for issuing the Accounting Research Bulletins, which later became Accounting Principles Board (APB) Opinions.

The Financial Accounting Standards Board (FASB) was established in 1973 and replaced the CAP. The FASB is responsible for creating and issuing financial accounting standards, improving the clarity and consistency of financial reports, and making sure that GAAP remains up-to-date and relevant with each changing economic and regulatory environment.

Uses of GAAP

GAAP is used to help private, public, and non-profit organizations adhere to a uniform set of accounting standards. These rules provide consistency in assessing financials across companies of differing sizes and sizes in different industries. They enable analysts and investors to compare the financial performance of different companies and make sound assumptions when making investment decisions.

Companies of any size and complexity that must file financial statements with the Securities and Exchange Commission (SEC) must follow GAAP. Companies can use either GAAP or International Financial Reporting Standards (IFRS) as their reporting basis. GAAP is typically used in the U.S., while IFRS is used in many other countries.

In addition to corporate users, GAAP is also used by small businesses to report financial information to management, banks and other creditors, investors and income tax agencies. Because different governments have different laws regarding financial reporting, all companies that use accounting principles should be familiar with the laws in their respective countries.

The use of GAAP is also useful for auditing, as it helps auditors prepare opinions on whether or not financial statements are presented fairly. It helps external auditors assess the financial position of a company and prepare an opinion on the level of accuracy of the financial presentations and the management’s compliance with the applicable standards.

Overall, GAAP establishes a standard to which all corporate financial reports must adhere to remain accurate and reliable. Whether it is a small, private company or a multi-national corporation, all must abide by GAAP guidelines. Without GAAP, comparing the financial performance and reporting accuracy of companies would be nearly impossible.