What is 'Gaap'

The Generally Accepted Accounting Principles
Accounting is the process of measuring, processing, and communicating the financial information of a business or corporate. It is guided by a set of accounting rules that help find appropriate results.

Hence these rules, universally known as Generally Accepted Accounting Principles(GAAP), are a set of principles, procedures, or standards used by companies while consolidating their financial statements for the respective financial year. These rules are enforced and set by "The Financial Accounting Standards Board (FASB) and "The Securities and Exchange Commission (SEC).

Objectives of GAAP
The motive of these accounting principles are

• Guide the financial statements to the general guidelines
• It standardises the different methods used in accounting across all the entities.
• It helps in the classification of different types of financial aspects.
• It helps in the formation of revenue and balance sheets.
• It also ensures the consistency and transparency of the financial statements.
• It helps in easy understanding of the financial background of the company.
• With these accounting principles, the Decision makers and investors can easily analyse The financial aspects of the company.
• This helps them in taking wise future decisions.

The principles of GAAP
The ten key accounting principles that make GAAP are
RegularityThe accountant must adhere to the gap rules and regulations while forming the financial statements regularly.

Sincerity
The accountant must be sincere enough to provide an accurate and impartial picture of the company's financial statements. He must not adopt any unfair practices for his benefit.

Consistency
There should be consistency within the corresponding financial statements. The same standards should be followed throughout to avoid any discrepancies. Any updations in the principles of the statements should be disclosed.

Permanence of methods
The method of finding financial results must be consistent. This ensures a fair comparison with different years.

Prudence
The financial data and analysis should be based on facts and principles. Any kind of assumptions or speculations must not guide them.

Continuity
The valuation of a company's assets should be based on the fact that the business will continue its operations in the coming years too.

Non-compensation
The financial statements and their analysis will be appropriate only when the negative and positive aspects are reported with complete transparency and unbiasedness.

Periodicity
The importance of time-period is immense while calculating the statements. Data entry must be done at the appropriate time.

Materiality
All the assets, as well as the liabilities, must be transparently disclosed in the financial statements to obtain fair results.

Utmost good faith
The people involved in making financial statements must be fair and honest.

Limitations of GAAP
Nothing can guarantee 100% results. Similarly, GAAP has its limitations. These accounting principles strive for the transparency of financial statements. But there is no guarantee that the company's financial picture is free from errors or biases.

Diversity among companies
GAAP has a "one-size-fits-all" approach to financial accounting. It does not address the size and complexity of the company. Each company has its unique environment, and these accounting principles cannot suit each. These principles can be too complex for small businesses to implement.

Time frame
Due to the complex process of setting gap standards, any modifications can lead to a delay in approving new standards. This can cause further delays in making decisions.

Nature of the company
GAAP accounting principles are not international standards that can suit every business. These are more specific to countries like the U.S.A. Based on international standards, IFRS is more favourable for countries like Europe, Canada, India, etc. Thus, it makes it difficult for many companies to follow it.

Omissions
Sometimes, deliberate omissions or editing are done to provide a different picture of the financial statements. This is done by some greedy accountants or the company's stakeholders for their profits.

These limitations defeat the uses and objectives of using GAAP. It is then suggested that the accounts must be scrutinised for further uses.

Who uses GAAP?
The companies whose stocks are publicly traded are required to disclose GAAP-compliant financial statements. It is reviewed by lenders and creditors while investing in the company.

What is the difference between GAAP and IFRS
In contrast to GAAP, IFRS is the international financial reporting standard that guides how companies consolidate and present their financial statements. Although GAAP and IFRS have the same objective, they have a few differences.

• Financial Aspect
• GAAP
• IFRS
• Inventory cost
• Last-in/first-out (LIFO) inventory cost
• Does not accept LIFO
• Development cost
• Development costs as expenses
• Development costs as capital investment
• Write-downs
• Does not allow Inventory reductions in the value of the asset
• Allows write-downs, if Asset value changes
• Fixed assets
• Records Fixed assets at their historical cost
• Records fixed assets at their market value

What are the benefits of GAAP?
GAAP assures various benefits like

• Strives for fair and trustworthy financial statements.
• Helps in formulating plans for the company.
• It easily accommodates any reforms or updations.
• Ensures easy analysis of the company’s financial status for investment purposes.

What are the criteria or nature of GAAP accounting principles?
There are three major criteria of GAAP

Relevance
The data or information must be true to the facts relevant to the user.

Objectivity
The data must solve the purpose. Also, it should be free from any bias.

Feasibility
The principle could be easily implemented with the least cost.

How does GAAP works?

• GAAP helps in the accounting process.
• It enters the financial data into organised records.
• It summarises the records into statements.
• It displays these statements as proper accounts.

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