Concept of GAAP( Generally Accounting principles)
GAAP stands for Generally Accepted Accounting Principles. It is a set of standardized principles, guidelines, and procedures that companies use to prepare and present their financial statements. GAAP is designed to ensure consistency, comparability, and transparency in financial reporting, making it easier for investors, creditors, and other stakeholders to understand and analyze financial information.
Features of GAAP
- Consistency: Companies are encouraged to use consistent accounting methods and procedures from one period to the next. This allows for meaningful comparisons over time.
- Relevance and Reliability: Financial information should be relevant to the decision-making needs of users and should be reliable. Reliability is achieved through verifiability, representational faithfulness, and neutrality.
- Comparability: Financial statements should be prepared in a way that allows for meaningful comparisons between different companies or within the same company over different periods.
- Materiality: Information is considered material if its omission or misstatement could influence the economic decisions of users. Material items should be disclosed in financial statements.
