What is GAAP ?
Generally Accepted Accounting Principles (GAAP) is a set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB). GAAP is designed to promote consistency in financial reporting and provide investors with an accurate measure of an organization's financial performance. It is also used to compare the performance of businesses across different industries or countries.
The main purpose of GAAP is to ensure that all companies in a particular industry use the same methods to report their financial results, allowing investors to make reliable financial comparisons and decisions. In addition, GAAP helps to minimize discrepancies in financial information from different sources, ensuring that all companies adhere to uniform standards when it comes to accounting. As a result, investors can review company financials with greater confidence.
The standard-setting process for GAAP is overseen by the FASB and the Government Accounting Standards Board (GASB) for federal, state, and local governments. The FASB reviews and modifies existing GAAP standards to consider changes in business practices, technology, and other economic factors. GAAP is composed of four basic conceptual frameworks, authoritative literature, applicable laws, and accepted practices.
Conceptual frameworks serve as a guide for understanding GAAP and its objectives. These frameworks enable organizations to consider financial statements and disclosures within the context of their specific business activities and to apply their knowledge of the underlying accounting principles to their operations.
Authoritative literature is composed of authoritative pronouncements, or documents, issued by the FASB and the GASB. These pronouncements list the specific rules and procedures related to GAAP. They also provide guidance regarding how these rules should be applied in practice.
Applicable laws are issued by government agencies and are generally applicable across all industries. These laws can require companies to disclose certain information or limit their reporting activities in certain areas.
Accepted practices refer to the accepted ways in which companies have historically reported information in their financial statements. These practices often differ from industry to industry, but they provide a useful guide for those who are new to the field.
In conclusion GAAP is a comprehensive set of accounting principles, standards, and procedures that are designed to ensure that all companies report their financial results in a consistent manner. It provides investors with reliable data when making financial decisions and allows them to make well-informed investment choices.
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