Generally Accepted Accounting Principles (GAAP)
The rules and procedures for reporting under GAAP are complex and have developed over a long period of time. Currently there are more than 150 "pronouncements" as to how to account for different types of transactions, ranging from how to report regular income from the sale of goods, and its related inventory values, to accounting for incentive stock option distributions. By using consistent principles, all companies reporting under GAAP report these transactions on their financial statements in a consistent manner.
The various rules and pronouncements come from the Financial Accounting Standards Board (FASB) which is a non-profit organization that the accounting profession has created to promulgate the rules of GAAP reporting and to amend the rules of GAAP reporting as occasion requires. The more recent pronouncements come as Statements of the Financial Accounting Board (SFAS). Changes in the GAAP rules can carry tremendous impact upon American business. For example, when FASB stopped requiring banks to mark their assets (loans) to the lower of cost or market (i.e. value of a foreclosed home loan). the effect on a bank's "net worth" as defined by GAAP can change dramatically. While generally neutral, there is some pressure on the FASB to yield to industry or political pressure when it makes its rules.
GAAP is slowly being phased out in favor of the International Accounting Standards as the global business becomes more pervasive. GAAP applies only to United States financial reporting and thus an American company reporting under GAAP might show different results if it was compared to a British company, that uses the International Standards. While there is tremendous similarity in between GAAP and the International Rules. the differences can lead a financial statement user to incorrectly believe that company A made more money than company B simply because they report using different rules. The move towards International Standards seeks to eliminate this kind of disparity.
The term "GAAP" is an abbreviation for Generally Accepted Accounting Principles (GAAP). GAAP is a codification of how CPA firms and corporations prepare and present their business income and expense, assets and liabilities on their financial statements. GAAP is not a single accounting rule, but rather the aggregate of many rules on how to account for various transactions.
When preparing financial statements prepared using GAAP, most American corporations and other business entities use the many rules of how to report business transactions based upon the various GAAP rules. This provides for consistency in the reporting of companies and businesses so that financial analysis, Banks, Shareholders and the SEC can have all reporting companies preparing their financial statements using the same rules and reporting procedures.
The various rules and pronouncements come from the Financial Accounting Standards Board (FASB) which is a non-profit organization that the accounting profession has created to promulgate the rules of GAAP reporting and to amend the rules of GAAP reporting as occasion requires. The more recent pronouncements come as Statements of the Financial Accounting Board (SFAS). Changes in the GAAP rules can carry tremendous impact upon American business. For example, when FASB stopped requiring banks to mark their assets (loans) to the lower of cost or market (i.e. value of a foreclosed home loan). the effect on a bank's "net worth" as defined by GAAP can change dramatically. While generally neutral, there is some pressure on the FASB to yield to industry or political pressure when it makes its rules.
GAAP is slowly being phased out in favor of the International Accounting Standards as the global business becomes more pervasive. GAAP applies only to United States financial reporting and thus an American company reporting under GAAP might show different results if it was compared to a British company, that uses the International Standards. While there is tremendous similarity in between GAAP and the International Rules. the differences can lead a financial statement user to incorrectly believe that company A made more money than company B simply because they report using different rules. The move towards International Standards seeks to eliminate this kind of disparity.
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