Generally Accepted Accounting Principles (GAAP) is a widely accepted set of rules, conventions, standards and procedures for reporting financial information issued by the Financial Accounting Standards Board (FASB). It governs major financial statements like the income statement, balance sheet and cash flow statement. These common sets of principles are not laws or strict rules. It impacts- analysts, financial journalists, investors, Shareholders, employees, etc.
There are 4 basic principles of GAAP which include objectivity, materiality, consistency and prudence. Along with it the other key GAAP principles that must be outlined are: Principle of Regularity, of Sincerity, principles of Permanence of Methods, principle of Non-Compensation, principle of Good Faith, etc..
Why we need GAAP –
GAAP helps in Globalization and liberalization of the economy. It caters to easy Cross Country business. Uniformity of accountancy principles brings trust in the financial markets. Also, it is used by accountants all over the world to steer their decisions.
The most notable GAAP benefits are:
- Consistency: GAAP gives consistency to accounting transactions all over the world which leads to a fair presentation. Consistent data helps a company to determine its overall performance, identify areas that need improvement and judge the financial changes.
- Stakeholder’s trust: Compliance with GAAP helps financial status to be better understood by creditors, lenders and stockholders. It reassures outsiders that a company’s financial reports portray a true and fair financial position.
- Comparable statements: Anyone who reads your financial statements can easily analyze and compare them. It also reduces risk of misrepresentation and avoids fraud.
GAAP allows companies to make financial decisions with confidence. However, GAAP tends to take a “one-size-fits-all” approach rather than accounting for the immense diversity that is often seen between companies. As a result, using GAAP principles can be difficult especially for smaller businesses.
In India, The Institute of Chartered Accountants (ICAI) is in authority to formulate standards to prepare financial statements. Indian GAAP primarily comprises 18 accounting standards (AS) issued by ICAI. This Accounting Standards (AS) as notified under section 133 of the Companies Act 2013 are formulated keeping in mind the GAAP standards.
GAAP is not a sole accounting law, but rules that improve consistency, clarity and comparability of financial statements.
All the concepts under this topic “ GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)” have been compiled into a certificate Assessment course. This assessment will help you to check and enhance your knowledge about the subject and offer you to get certified from The Growth Central VC. This Assessment has been made considering the latest scenario of the industry.