Why is it required that financial statements are prepared under Generally Accepted Accounting Principles?

Expert Solution

GAAP - Generally accepted Accounting principles is a standard framework of guidelines for financial accounting. It is a set of rules that encompasses the details, methods and complexities of financial accounting. Mostly, all government, or companies in USA prepare their financial accounting under GAAP , it is built to eliminate misleading accounting statements and Regulate financial accounting practices.

REASONS FOR PREPARING FINANCIAL ACCOUNTING UNDER GAAP

1. Consistency -. GAPP ensures that all organisations uses the same methods of preparing accounts year to year , which leads to consistency and makes it easier for stakeholders to evaluate financial data.

2. Decision - Making - GAAP provides standards for recording and analysing the transactions and give information that helps users of financial statements to make effective decisions. It makes financial reporting accurate and relevant.

3. Reliability and Transperancy- GAAP allows auditors to verify the accounting statements which makes finance Accounting more reliable and transparent for external users like stakeholders , investors etc.

4. Comparability - As all the organisation uses same standards given by GAAP , it enhances the comparability and firms are able to compare their reports , profit or losses with other firm.

5, Analysing and Interpretation - The main aim of GAAP is to ensure that all financial statements are complete and consistent. This makes it easier for stakeholders , investors and other external users to analyze and get information from the financial statements of firm. It also interpret the statements to make decisions.

Nightingale answered 2 years ago

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