Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles (GAAP) is a framework of accounting standards, rules, and procedures defined by policy boards, which are used to prepare and present financial statements. These principles are intended to ensure consistency, transparency, and comparability in the financial reporting process, which is crucial for investors, creditors, and other users of financial statements.

History and Development

The development of GAAP can be traced back to the early 20th century when the need for uniform accounting standards became apparent due to the growth of corporate America and the stock market. Here are some key milestones:

• 1934: The Securities and Exchange Commission (SEC) was established following the Great Depression. The SEC has significant authority over corporate accounting practices in the U.S., including the ability to set standards for publicly traded companies.
• 1939: The American Institute of Certified Public Accountants (AICPA) issued the first set of accounting standards, known as "Accounting Research Bulletins."
• 1959: The AICPA created the Accounting Principles Board (APB) to develop accounting principles. The APB issued 31 opinions.
• 1973: The Financial Accounting Standards Board (FASB) was established, replacing the APB. The FASB is now recognized as the primary source of GAAP.
• 1984: The Emerging Issues Task Force (EITF) was formed by the FASB to provide timely guidance on new or emerging accounting issues.
• 2002: The Sarbanes-Oxley Act was passed in response to corporate scandals, which indirectly influenced GAAP by enforcing stricter financial reporting requirements.

Key Principles and Components

GAAP includes several principles and standards:

• Principle of Regularity: Adherence to GAAP rules.
• Principle of Consistency: Consistent application of accounting methods.
• Principle of Sincerity: Providing an accurate and impartial depiction of the company's financial situation.
• Principle of Permanence of Methods: Uniform procedures in financial reporting.
• Principle of Non-Compensation: Full disclosure of financial information without expectation of debt compensation.
• Principle of Prudence: Exercising caution in financial reporting.
• Principle of Continuity: Assuming the business will continue operation indefinitely.
• Principle of Periodicity: Reporting financial data in regular intervals.
• Principle of Full Disclosure/Materiality: All relevant information must be disclosed.
• Principle of Utmost Good Faith: All parties involved should act honestly.

GAAP and International Standards

While GAAP is primarily used in the United States, there has been an ongoing convergence effort between GAAP and International Financial Reporting Standards (IFRS). This convergence aims to reduce the differences between these two sets of standards to facilitate global comparability of financial statements.

Enforcement and Compliance

Compliance with GAAP is enforced by various bodies:

• The SEC has the authority to enforce GAAP for publicly traded companies.
• The Public Company Accounting Oversight Board (PCAOB) oversees audits of public companies.
• The AICPA and state boards of accountancy also play roles in ensuring compliance.

External Links for Further Reading

• FASB - Financial Accounting Standards Board official website.
• SEC - Information on GAAP from the U.S. Securities and Exchange Commission.
• AICPA - American Institute of CPAs GAAP resources.
• Investopedia - Overview of GAAP.

Related Topics

• International Financial Reporting Standards
• Financial Accounting
• Auditing
• Financial Statement Analysis