The phrase U.S. generally accepted accounting principles is an accounting term that
A commonly recognized set of rules and procedures governing corporate accounting and financial reporting Show
What is GAAP?GAAP, or Generally Accepted Accounting Principles, is a commonly recognized set of rules and procedures designed to govern corporate accounting and financial reporting in the United States (US). The US GAAP is a comprehensive set of accounting practices that were developed jointly by the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB), so they are applied to governmental and non-profit accounting as well. US securities law requires all publicly-traded companies, as well as any company that publicly releases financial statements, to follow the GAAP principles and procedures. In addition, or as an alternative, are the International Financial Reporting Standards (IFRS) established by the International Accounting Standards Board (IASB). The IFRS rules govern accounting standards in the European Union, as well as in a number of countries in South America and Asia. The Core GAAP PrinciplesGAAP is set forth in 10 primary principles, as follows:
The Generally Accepted Accounting Principles further set out specific rules and principles governing such things as standardized currency units, cost and revenue recognition, financial statement format and presentation, and required disclosures. For example, it requires precise matching of expenses with revenues for the same accounting period (the matching principle). History of GAAPGenerally Accepted Accounting Principles were eventually established primarily as a response to the Stock Market Crash of 1929 and the subsequent Great Depression, which were believed to be at least partially caused by less than forthright financial reporting practices by some publicly-traded companies. The federal government began working with professional accounting groups to establish standards and practices for consistent and accurate financial reporting. Generally Accepted Accounting Principles began to be established with legislation such as the Securities Act of 1933 and the Securities Exchange Act of 1934. The GAAP has gradually evolved, based on established concepts and standards, as well as on best practices that have come to be commonly accepted across different industries. Why is GAAP Important?Generally Accepted Accounting Principles make financial reporting standardized and transparent, using commonly accepted terms, practices, and procedures. The consistency of presentation of financial reports that results from GAAP makes it easy for investors and other interested parties (such as a board of directors) to more easily comprehend financial statements and compare the financial statements of one company with those of another company. GAAP also seeks to make non-profit and governmental entities more accountable by requiring them to clearly and honestly report their finances. In short, GAAP is designed to ensure a consistent presentation of financial statements, making it easier for people to read and comprehend the information contained in the statements. Applications in Financial AnalysisFor financial analysts performing valuation work and financial modeling, it’s important to have a solid understanding of accounting principles. While this is important, financial models focus more on cash flow and economic value, which is not significantly impacted by accounting principles (other than for the calculation of cash taxes). Alternatives to GAAPGAAP is the set of standards and practices that are followed in the United States, but what about other countries? Outside the US, the alternative in most countries is the International Financial Reporting Standards (IFRS), which is regulated by the International Accounting Standards Board (IASB). While the two systems have different principles, rules, and guidelines, IFRS and GAAP have been working towards merging the two systems. Additional ResourcesThank you for reading CFI’s guide to GAAP. To further your education, the following CFI resources will also be helpful:
What is meant by the phrase generally accepted accounting principles?Generally Accepted Accounting Principles (GAAP or US GAAP) are a collection of commonly-followed accounting rules and standards for financial reporting.
What are generally accepted accounting principles quizlet?Generally accepted accounting principles (GAAP) are rules that govern the practice of financial accounting. The goal of GAAP is to ensure that the information generated by financial accounting is relevant, reliable, consistent, and comparable. You just studied 32 terms!
What are the 4 principles of GAAP in accounting?The four basic principles in generally accepted accounting principles are: cost, revenue, matching and disclosure. The cost principle refers to the notion that all values listed and reported are the costs to obtain or acquire the asset, and not the fair market value.
Why is generally accepted accounting principles?Generally accepted accounting principles (GAAP) are used to prepare and report financial statements. The 10 principles of GAAP pertain to accounting consistency, transparency and ethics. Although GAAP is only mandatory for publicly traded and regulated companies, it is strongly encouraged for all companies.
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