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What are the generally accepted accounting principles, or GAAP?

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Quick Answer

Generally accepted accounting principles are a set of standards and procedures that companies use to prepare financial statements, explains Investopedia. GAAP are important because they require consistency among different companies and therefore make financial statements more user-friendly for external users such as investors and creditors.

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Full Answer

Generally accepted accounting principles are required for company financial statements because they give investors and creditors a level of consistency, comfort and comparability when conducting research and potential investment choices, according to Investopedia. GAAP cover a number of topics, such as revenue recognition and balance sheet classification.

The U.S. Securities and Exchange Commission requires publicly traded companies to follow GAAP, but GAAP are not mandatory for all businesses, notes Business News Daily. Companies without external investors do not have to follow GAAP, and the SEC is not responsible for companies following GAAP. In fact, the Financial Accounting Standards Board established the primary source of GAAP rules, which are available in the FASB handbook at the organization's official website.

Similar to GAAP for corporate entities, government entities must follow similar rules under the direction of the Government Accounting Standards Board, reports Business News Daily. In countries all over the world, companies are subject to similar rules and regulations. The basic understanding of standardized reporting is common. In Canada, companies follow guidelines under the Canadian Institute of Chartered Accountants. There are also many countries following international accounting standards under the International Accounting Standards Board.

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