GAAP Accounting
GAAP Definition
| GAAP is the acronym for Generally Accepted Accounting Principles, which refers to conventions, rules, and procedures that set the standard for presenting financial information in the U.S. |
The origins of Generally Accepted Accounting Principles and its issuing body, the Financial Accounting Standards Board (FASB), can be traced to the Securities Exchange Act of 1934, when Congress established the Securities Exchange Commission (SEC) in the aftermath of the great depression. The main purpose of the Securities Exchange Act was to restore investor confidence and reestablish integrity in the capital markets.
The SEC was given the authority to prescribe accounting principles and procedures for companies under its jurisdiction. These companies include all publicly traded companies and companies with more than $10 million in assets whose securities are held by more than 500 owners.
FASB and GAAP
The role of establishing Generally Accepted Accounting Principles was later transferred to the Financial Accounting Standards Board (FASB), an independent, specialized board created in 1973. The objective of FASB was to develop financial accounting and reporting standards that would help maintain user confidence in financial statements. This objective would be met mainly by establishing credibility of financial data reported. The body of pronouncements issued by FASB, known as U.S. GAAP, carries the full authoritative weight of Congress.
FASB makes the accounting rules, but the SEC enforces them.
| The SEC retains the power to enforce GAAP, impose a moratorium on accounting practices, and even overrule private sector pronouncements if there is reason for disagreement with FASB. |
GAAP Standards
U.S. GAAP is the standard by which businesses establish credibility by applying this uniform set of rules and practices when reporting financial data. Without these financial reporting standards, it would be very difficult for lenders, investors, and other financial statement users to compare and assess the true financial condition of companies.
Although the SEC only requires publicly traded companies or other regulated entities to comply with GAAP accounting standards, creditors, suppliers, and investors often require smaller businesses to comply with GAAP as a requirement to conduct business with them.
Pronouncements issued by FASB therefore affect most businesses in the U.S. This becomes even more important as FASB proposes sweeping changes to how assets and liabilities are valued as part of the convergence project with the International Accounting Standards Board (IASB).
| GAAP Accounting is now pervasive in the business world, and all rulings from FASB are considered GAAP.
On July 1, 2009, the FASB Accounting Standards Codification became the single source of authoritative U.S. GAAP. Accounting and financial reporting practices not included in the Codification are not GAAP. |
Financial statements of publicly traded companies issued in the United States are audited to ensure that a company prepares financial statements in accordance with U.S. GAAP.
The auditor does not express the opinion that the financial statements are fair and correct. It is the legal responsibility of company management to produce correct and fair financial statements. The auditor’s responsibility is to express an opinion on whether or not the financial statements are presented fairly in all material respects in accordance with GAAP.
Smaller businesses that are not required to follow GAAP accounting standards nonetheless often have external audits conducted to secure the trust of investors, creditors, and other financial statement users that their financial statements are presented in accordance with U.S. GAAP.
The below sections discuss the accounting theory that provides the logical framework from which to measure and report financial information in accordance with U.S. GAAP, with the primary objective of providing useful information to financial statement users.
GAAP Accounting Primary Qualities: Relevance and Reliability
GAAP Accounting Principles: Other Qualities of Accounting Information
Historical Cost and Fair Value Accounting
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