Generally Accepted Accounting Principles (GAAP)
Candlefocus EditorGAAP specifies how transactions should be reported on financial statements, including how companies should record revenues and expenses. It also provides specific guidelines for how companies should report fair value estimates, disclosures, investments, taxes, leases, and more. While GAAP does not provide explicit guidance for all financial reporting, it does provide estimates for unusual accounting situations.
GAAP has been around for more than 100 years and it is continually updated. In recent years, the FASB has released many GAAP updates that have sought to improve the way companies report financial information. For example, since 2019, most companies have been required to follow a new revenue recognition standard known as the codification of Generally Accepted Accounting Principles.
In addition to establishing general rules for financial statement reporting, GAAP also establishes specific rules for companies in certain industries, such as insurance companies and banks. These specific rules help to ensure that companies in the same industry follow the same accounting principles.
Despite its many benefits, GAAP has some limitations. For one, its uniformity can limit some companies’ creativity in the way they report financial information. Additionally, not all companies are required to follow the same set of GAAP rules. Companies listed on the U.S. stock exchange must follow GAAP, while non-public companies may have some leeway in their reporting.
GAAP is an important set of rules for the management of a company’s financial information. By adhering to GAAP, companies can ensure that their financial statements are consistent, comparable, and easily understood. By doing so, they can create more confidence among investors and help to better inform their decision-making.