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.
Explanation :
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.
In a nutshell :
- GAAP is the set of accounting principles set forth by the FASB that U.S. companies must follow when putting together financial statements.
- GAAP aims to improve the clarity, consistency, and comparability of the communication of financial information.
- GAAP may be contrasted with pro forma accounting, which is a non-GAAP financial reporting method.
- The ultimate goal of GAAP is to ensure a company's financial statements are complete, consistent, and comparable.
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