GAAP, which stands for Generally Accepted Accounting Principles, represents a collection of standard accounting rules and guidelines used by companies in the United States. These principles ensure that financial statements are transparent, consistent, and accurate, enabling investors, regulators, and other stakeholders to make well-informed decisions. The Financial Accounting Standards Board (FASB) publishes and maintains GAAP, with the Accounting Standards Codification outlining the specific rules for non-governmental organizations. GAAP is also used by government agencies and Securities and Exchange Commission (SEC) registrants.
GAAP is built upon ten fundamental principles, including regularity, consistency, sincerity, and prudence. These principles promote reliable financial reporting, reduce the risk of errors or fraudulent reporting, and facilitate easy comparison between different businesses. While GAAP is mandatory for publicly traded companies, many private companies also choose to follow it. By adhering to GAAP, businesses can maintain transparency, accuracy, and trust in their financial reporting, which is essential for attracting investors and securing funding.
