What are Generally Accepted Accounting Principles

GAAP stands for Generally Accepted Accounting Principles. GAAP was established by the Federal Accounting Standards Board to assure that most commonly used practices in accounting such as reporting earnings and losses by most businesses are consistent. Most organizations in the United States are expected to follow GAAP standards.

Many accountants working for private, public and governments organization most often use GAAP standards to prepare financial statements. Most of the information provided on financial statements is essential for potential investors and creditors for making the right economic decision based on the economic activity of the company, the time such activity is made and recorded and summarized information of their financial statements.

GAAP is very important to help companies keep and maintain the standards on how to report their earnings as well as their losses to help prospective investors and creditors to have better understanding about their financial activities and compare their financial statements to others before making an investment. Without GAAP, companies would simply be free to decide what financial information to report and how to report it allowing them to be dishonest in representing themselves and the state of their company to investors and creditors. Most investors want to make the right decision when it comes to investing in the future of a company. They want to be able to see and understand all the financial numbers and have something real to compare their evaluations so they can make the best financial decision at the end. GAAP helps the investors and the creditors by requiring companies to provide and disclose useful, reliable, consistent and comparable information about their financial statements.

Small businesses are not required to use GAAP, but if they are seeking investors or trying to obtain credit, they must then follow the GAAP guidelines when preparing their financial statements. As an accountant, if you are in charge of the financial reporting of a company or government entity, you are required and expected to know and understand the principles of GAAP. The main reason to use GAAP is that it helps the company to maintain creditability with its creditors and investors because they assume that you follow all procedures and guidelines. Banks and other finance companies frequently require their clients to use GAAP or have audited financial statements. Most investors will not have any thing to do with your company if your financial statements were not prepared under the guidelines of GAAP. Besides, a company will generally have a more solid accounting system if it follows standards so that it can be sure that there is continuity in the company.

GAAP is a system that is very well established and seems to work great in the United States. Most companies that prepare financial statements using the GAAP guidelines are highly regarded in the United States for the quality and comparability of the information they provide. All required information for investors and creditors needed to understand any of the company's decisions must be included in the financial statements. All information needed to help stockholders to make decisions related to the company must be included in the financial statements as well. It is very necessary for accountants to follow the GAAP standards when preparing the business financial statements for investors and creditors to see.