If you are in the business realm you most likely have heard the term GAAP, also known as Generally Accepted Accounting Principles, but you might still be unsure as to what it really means for you. This is where this blog comes in handy, and we hope that it will clarify your questions and help you get onto the right track. Basically, GAAP is the language of the IRS and accountants, and if you own a small business, you will be dealing with GAAP rules whether you know them or not.
Generally Accepted Accounting Principles (GAAP) are a common set of accounting principles, standards, and procedures that were set by the Financial Accounting Standards Board (FASB). In the United States, when accountants compile a company’s financial statements, public companies must follow GAAP. The goal of GAAP is to improve the clarity, consistency, and comparability of financial information amongst different companies through the fact that GAAP consists of authoritative standards and commonly accepted ways to record and report accounting information. GAAP is an important concept because it helps to maintain trust in financial institutions and also helps investors to analyze companies due to them having some sort of basis for their “playing grounds” so to speak. All in all, the purpose of GAAP is to ensure that the financial information that is provided to investors and regulators is accurate, reliable, and consistent.
In short, as previously alluded to, GAAP tries to make sure that the financial statements of a company are complete, consistent, and comparable. This is done by attempting to standardize and regulate the definitions, assumptions, and methods that are used in accounting in all companies.