May 17 2011

What is GAAP in accounting?

Category: Accounting

Answer:

GAAPGAAP is an acronym that stands for Generally Accepted Accounting Principles. It is a set of standards and procedures that organizations follow when preparing their accounting and financial statements for review by investors. GAAP is set by the Financial Accounting Standards Board (FASB) which is overseen by the Securities Exchange Commission (SEC). They are essentially the consistent rules used for recording the various transactions that are associated with running a business. This consistency gives financial analysts and shareholders the ability to compare financial data from one sector to another with the assurance that what they are comparing is equivalently derived. The principles of GAAP are:

  • Consistency – All reporting is the done in identical fashions across specified periods.
  • Relevance – All information is relevant and appropriate.
  • Reliability – Any reported information must be audited by a 3rd party.
  • Comparability – Information should be comparable with other companies in the sector.

The goal of GAAP is to ultimately create a level playing field that allows the generally public to properly evaluate any company based upon their reported financial information. More information on GAAP can be found here.


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