Question

What is GAAP and what is the purpose of Gaap?

Answer 1

Generally accepted accounting principles:-

Generally accepted accounting principles, or GAAP, are a set of rules that encompass the details, complexities, and legalities of business and corporate accounting. The Financial Accounting Standards Board (FASB) uses GAAP as the foundation for its comprehensive set of approved accounting methods and practices.

Purpose of GAAP:-

The specifications of GAAP, which is the standard adopted by the U.S. Securities and Exchange Commission (SEC), include definitions of concepts and principles, as well as industry-specific rules. The purpose of GAAP is to ensure that financial reporting is transparent and consistent from one organization to another.

The real goal of the profession (and thus GAAP) is to create standardized financial information that is useful to many stakeholders allowing them to make assessments on financial statements in a uniform way. If I wanted to compare two similar investments I had in the Mineral Exploration business, I could only do that if I was looking at “apples to apples”. If the two respective accounting systems were completely different and not standardized, I would be looking at “apples to oranges” and would NOT be able to glean anything useful from the comparatives.

Therefore GAAP’s purpose is to regulate and guide the profession and close the expectation gap (no pun intended). The expectation gap is the difference between what users of accounting expect and what accountants deliver. If we all delivered the same products in completely different ways than it would be very hard to create value that was easily understood.

There are also some complicated situations where a codified approach is much preferred to personal judgment (such as consolidations and tax)