Generally Accepted Accounting Principles (GAAP) is a set of standardized accounting rules, standards, and procedures used primarily in the United States to prepare, present, and report financial statements. GAAP is issued and frequently updated by authoritative bodies such as the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB)
Key Aspects of GAAP:
- Purpose: GAAP ensures financial statements are complete, consistent, and comparable, providing transparency and accuracy in financial reporting for investors, regulators, and other stakeholders
- Scope: It applies to publicly traded companies, government entities, and many private organizations in the U.S. All 50 states and many local government entities follow GAAP in their financial reporting
- Principles: GAAP is based on fundamental accounting assumptions and principles, including regularity, consistency, sincerity, permanence of methods, non-compensation, prudence, continuity, periodicity, materiality, and utmost good faith
- Comparison: GAAP is mainly used in the U.S., whereas many other countries follow the International Financial Reporting Standards (IFRS)
- History: GAAP was developed in response to financial reporting issues that contributed to the Stock Market Crash of 1929 and the Great Depression, aiming to improve transparency and reduce financial misrepresentation
Basic Assumptions Under GAAP:
- The business is separate from its owners (business entity assumption).
- The business will continue indefinitely (going concern).
- A stable currency (U.S. dollar) is the unit of record (monetary unit principle).
- Economic activities can be divided into consistent time periods (time-period principle)
In summary, GAAP is the foundational framework of accounting standards in the U.S. that governs how financial information is recorded and reported to ensure clarity, reliability, and comparability across organizations
