GAAP
Generally Accepted Accounting Principles (GAAP) are a set of standardized accounting rules and practices that public and private companies, non-profit organizations, and government entities in the United States follow when preparing and presenting their financial statements. GAAP provides a framework for financial reporting, ensuring consistency, comparability, and transparency in the presentation of financial information.
The Financial Accounting Standards Board (FASB), a private, non-profit organization, is responsible for establishing and maintaining GAAP. The FASB issues accounting standards updates (ASUs) and provides guidance on the application of GAAP through its Accounting Standards Codification (ASC), which organizes GAAP rules and principles into a single, authoritative source.
GAAP is based on several key principles that underpin its application in financial reporting. These include:
- Accrual basis accounting: GAAP requires that financial transactions be recorded when they are incurred, rather than when cash is received or paid.
- Consistency: Companies must consistently apply the same accounting methods and principles from one reporting period to another, allowing for comparability across time.
- Materiality: Financial information is considered material if its omission or misstatement could influence the economic decisions of users of financial statements.
- Conservatism: In situations where there is uncertainty or doubt, GAAP requires accountants to choose the method or estimate that is least likely to overstate assets or income, or understate liabilities or expenses.
While GAAP is widely followed in the United States, many countries adhere to the International Financial Reporting Standards (IFRS), established by the International Accounting Standards Board (IASB). There have been ongoing efforts to harmonize GAAP and IFRS, with the goal of creating a single, global set of accounting standards.
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