What Is Gaap? Describe the Importance of Gaap

Q.2. What is GAAP? Describe the importance of GAAP.

Ans: GAAP: Generally Accepted Accounting Principles (GAAP) is a widely accepted set of rules, conventions, standards and procedures for reporting financial information, as established by the Financial Accounting Standard Board. It is a combination of standards which are set by policy boards and the generally accepted ways of recording and reporting financial information. The core principles of GAAP are basic accounting rules that rarely change and universally accepted.

Importance of GAAP: GAAP are compulsory for companies so that investors have a least level of stability in the financial statements they use when considering companies for investment purpose. GAAP cover such things as revenue recognition, balance sheet item classification and outstanding share measurement. Companies are expected to follow GAAP rules when reporting their financial data via financial statement. Many people rely on objective reporting of financial information by companies and other individuals and the GAAP help ensure that data is neutral and consistent. It serves as a common language among accounting and finance professionals, allowing stakeholders to compare financial statements across corporations and vast time period. An investor who wishes to invest in the automobile industry, for example, can meaningfully compare the profit figures of two automakers only if they were prepared using the same principles. The reliability of GAAP in financial statements makes it easy for any investor to come in and read your balance sheets and financial statements. This makes it easy for investors to compare businesses and decide which the better investment is or to decide if your business is a good investment at all. GAAP also minimizes the risk of accidental errors through completion of checks and safeguards, and provides assurance to the users of financial statements.GAAP can help companies