Question

how does GAAP relate to the world of accounting? Why do we need uniformity?

Answer 1

Relation of GAAP to the world of accounting:

Accounting is an information system and its main aim is to provide financial information to a number of parties such as investors, management, creditors, Governments, etc. Such information is provided through a set of financial statements, namely, profit and loss account and Balance Sheet.

Over a period of time a number of Generally Accepted Accounting Principles (GAAP) in the form of concepts and conventions have been developed and accepted to bring comparability and uniformity in the financial statements of various business entities. Certain standards must be followed for preparing the financial statements, so that there is the minimum possible ambiguity and uncertainty about the figures contained in the financial statements.

Need for uniformity:

GAAPs ensure the consistency and comparability of Financial Statements. It makes the financial statements of different enterprises or of the same enterprise for different accounting periods comparable. They bring the uniformity of assumptions, rules and policies adopted in the preparation of financial statements and thus they ensure the consistency and comparability of such statements which in turn ensures better comparison of profitability, financial position and future prospects of an enterprise. In the absence of GAAPs, comparison of different financial statements may lead to wrong conclusions because each enterprise would evolve its own rules or standards to suit its purpose.