Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles (GAAP) are a set of rules and standards used in the United States to ensure the consistency, transparency, and comparability of financial reporting. GAAP encompasses a broad range of accounting principles, standards, and procedures that companies must follow when compiling their financial statements.

GAAP aims to provide a framework for financial reporting that enhances the reLiability of financial statements. It is used by publicly traded companies to maintain a uniform standard of reporting, which helps investors and regulators evaluate financial performance.

Key principles of GAAP include:

• Consistency: Companies should use the same financial reporting practices over time.
• Relevance: Information presented should be pertinent to the decision-making needs of users.
• ReLiability: Financial information should be accurate and Trustworthy.
• Comparability: Financial statements should be comparable across different companies and time periods.

Examples of GAAP in practice include:

• Using the accrual basis of accounting, where Revenues are recognized when earned and expenses when incurred, rather than when cash is received or paid.
• Classifying expenses consistently between periods to allow for meaningful comparisons.

In cases where companies fail to comply with GAAP, they may face legal repercussions, loss of investor Trust, or delisting from Stock exchanges. For instance, the Enron scandal involved significant deviations from GAAP, leading to massive financial losses and regulatory reforms.