What are Generally Accepted Accounting Principles (GAAP)?

Published by Thomas Herold in Accounting, Laws & Regulations

'Generally Accepted Accounting Principles (GAAP)' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Generally Accepted Accounting Principles, more commonly referred to by their acronym GAAP, are the mostly American used set of accounting principles, procedures, and standards. These are utilized by companies to put together their corporate financial statements. Such GAAP proves to be a blend of the most accepted means of reporting and recording accounting data in the United States combined with the American policy board set standards.

Companies must use GAAP in order for their investors to have some common standard of consistency with financial statements they compare when considering the various companies in which to invest their money. These standards include such areas as balance sheet items classification, revenue recognition, and measurements of outstanding shares of stock.

Regulators expect that companies will obey these generally accepted accounting principles rules as they release their financial statements to routinely report their financial information. American investors should be leery of company financial statements that are not properly developed utilizing these guiding principles.

Despite this fact, these accounting procedures are merely a cohesive group of guidelines and standards. Crooked accountants are still able to distort and misrepresent the numbers while using these generally accepted procedures. Although a company may utilize the generally accepted procedures, investors should still carefully go through their financial statements with a healthy degree of skepticism.

The competing accounting standards that most of the rest of the world employs is known as the IFRS International Financial Reporting Standards. There has been a recent move to harmonize the two sets of standards in past years. Because of the global financial crisis and economic collapse of 2008 and its terrible aftermath, globalization, the SEC agreeing to accept international standards, and the Sarbanes-Oxley Act, countries like the United States have been severely pressured to close the gap between GAAP and the IFRS.

Doing so would have major ramifications on accounting throughout the U.S. It also would affect investors, corporate management teams, accountants, national accounting standard makers, and American stock markets. Bringing these two sets of standards together is impacting CFO and CPA attitudes regarding international accounting. This influences the International Accounting Standards quality as well as the various endeavors that professionals are making on converging the two sets of standards.

There are some problematic inconsistencies with international financial reporting because the financial reporting standards and rules are somewhat different from one country to another. This dilemma has become more of a challenge for those international investors who are attempting to figure out the various differences in global accounting and reporting. As they are thinking about offering substantial investments to overseas companies which are earnestly seeking capital in good faith, it makes it more challenging since companies report according to the standards of the country where they do business.

The IASB International Accounting Standards Board has been sincerely looking for a practical solution to this international complication, confusion, and conflict that inconsistency in accounting standards for financial reporting has created and continues to encourage. The principle difference with GAAP and the IFRS methods lies in the totally different approaches that either one uses regarding the standards.

Generally Accepted Accounting Practices prove to be based on a set of rules. It employs a complicated group of guidelines that set criteria and rules in any given scenario. The International Financial Reporting Standards alternatively utilizes a method based on principles. The IFRS instead starts with the goal of good financial reporting and gives guidance on the particular needs and challenges of a given scenario.

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The term 'Generally Accepted Accounting Principles (GAAP)' is included in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.