Definition: GAAP stands for Generally Accepted Accounting Principles. As the name implies, these principles make up the rules and concepts of financial accounting that are generally accepted in the United States. GAAP is the standard in accounting. The entire point of GAAP is to make financial statements and reporting relevant, reliable, and comparable for people who use the financial information.
What Does GAAP Mean?
Think about accounting and the philosophy of it. Basically, a company or an accountant puts a bunch of numbers down on a form and expects people to understand and trust the numbers are correct. What happens if one accountant does something one way and another does something the complete opposite way? How would anyone be able to compare financial statements of two companies if they were prepared using different standards and assumptions? You won’t be able to.
Unlike like many other professions, accounting rules have been kept predominantly private. What I mean by this is that the government doesn’t make up the rules. The federal government could step in and require companies to report financial information in a certain way, but it has largely left the ruling making for accounting standards up to the profession with the exception of the PCAOB and SEC.
GAAP is set by the Financial Accounting Standards Board or the FASB. This is a private organization or group that create rules for the accounting industry to follow. The GAAP hierarchy is extensive and includes many accounting principles and concepts including: the objectivity, cost-benefit principle, going concern, monetary unit, revenue recognition, and business entity principle. All of these principles help establish the standards for accounting in the US.