GAAP is short for Generally Accepted Accounting Principles. The accounting principles are rules on which accounting are based. These rules include procedure that must be followed and standards that must be adhered to during the practice of accounting.
The main aim of GAAP accounting is to provide a standardized way for the preparation of accounting and financial statements. This means that items in the financial statements are treated consistently. This makes it easier for investors to read and understand the financial statements of any equity. They also help investors make comparisons between the financial statements of different businesses in order to make investment decisions. GAAP not only determines how items such as events or transactions are treated but also how disclosures on the balance sheet and the profit and loss account, also known as the income statement, are treated.
Even though GAAP accounting ensures that financial statements are prepared based on the same rules, procedures and standards for consistency and easy comparability, GAAP will vary for different countries. However, the differences are usually not fundamental differences. The differences are usually brought about by different interpretations of these financial accounting principles. Public limited companies are required by law to adopt GAAP accounting, but other types of organizations generally adopt it even though they are not legally required to do so.
GAAP were developed over a long period of time and comprise of rules, procedures, conventions that characterize accounting practice. For instance in the United States, US GAAP, which is the oldest of the generally accepted accounting principles, came to being as a result of a long period of evolution. The different bodies responsible for the US GAAP include the American Institute of Certified Public Accountants (AICPA), the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC).
Today, the majority of countries have moved away for GAAP accounting and have adopted IFRS (International Finance Regulation Standards) accounting. IFRS accounting is being advocated by the International Accounting Standards Board (IASB). This move is due to the reality of increasing globalization of economies and the growth of multinational corporations.
The United States is amongst the last few countries moving to adopt IFRS. The US is lagging behind due to the fact that there are many glaring differences between GAAP accounting and IFRS accounting, There are however, very many similarities between the two standards of accounting. The differences have to be addressed and compromises reached before full adoption is implemented.
