Below are the explanation of GAAP and its features:
GAAP stands for Generally Accepted Accounting Principles.
• It represents a set of standardized accounting principles, procedures, and guidelines that companies follow when preparing their financial statements.
• GAAP is essential for ensuring consistency, comparability, and transparency in financial reporting, allowing investors, creditors, and other stakeholders to make informed decisions.
Features of GAAP:
There are four fundamental features of GAAP:
Relevance:
Relevance refers to the capacity of financial information to influence the decisions of users. In the context of GAAP, information is considered relevant if it has the potential to impact the economic decisions of users by aiding in their assessments of past, present, or future events.
Reliability:
Reliability is the quality of information that makes it trustworthy and dependable for decision-making. Reliable information is free from material errors or bias, faithfully represents the economic substance of transactions, and can be verified.
Understandability:
Understandability emphasizes the clarity and intelligibility of financial information. Information should be presented in a manner that is comprehensible to users with reasonable knowledge of business and economic activities. Under GAAP, financial statements and related disclosures should be clear, concise, and presented in a logical and organized manner.
Comparability:
Comparability is the ability to compare financial information across different entities or over different periods. GAAP aims to establish consistency in accounting practices, making it possible for users to assess similarities and differences between entities and financial statements.
