What is GAAP and Why is it Important?

GAAP or Generally Accepted Accounting Principles are basically in accounting terms rules that tell us how a financial statement should be made more coherent. FASB or Financial Accounting Standards Board uses US GAAP as a set of rules. 

GAAP came into existence to help prevent fraud. GAAP has some general tenets like a regular, consistent, sincere, permanent, non-compensate, prudent, continuous, periodical, fully disclosed, and honest. GAAP recognizes all the revenue and tells how much it is measurable. 

Speaking of measurement, GAAP also measures assets and liabilities properly, counting only when real money is concerned. It also recognizes expenses efficiently, which is balancing sheets except between income and expenses.

Difference between US GAAP and the World

The US Public sector uses GAAP meanwhile the rest of the world uses IRFS (International Financial Reporting Standards). The main difference between US GAAP and IRFS is that IRFS provides less information and works more like a principle. GAAP works more like a comprehensive set of economic rules that should be followed for better business dealings.

The Method used by GAAP

There are two types of accounting: Accrual accounting and cash accounting. Cash accounting is the type of accounting that looks at their income when received and expenses when they are due. 

Accrual accounting doesn't track the income and expenses simultaneously as they come, but they use a balance sheet to properly account for all the assets and liabilities in the business. 

GAAP uses accrual accounting for better clarity and understanding.

The Legality of GAAP

Although GAAP is not strictly enforced, since they are part of education in finance, most of the Certified Professional Accountant Firm (CPA Firm) follow US GAAP as the holy grail.

Advantage of GAAP

The main goal of US GAAP is to make all the professional accounting firm finances comparable, consistent and clear. GAAP is easy to understand worldwide as the rules applied by most of the US CPA firms are easy to understand and used in day-to-day life. So, this makes investing and doing business in other countries simple.

Suppose a company is trying to have an outside investment or be in a public sector industry (especially in the US). In that case, switching to GAAP-based financial statements becomes a necessity. As explained previously, it is more or less a universal language of finance. So it is better to use GAAP for more worldwide appeal.

To sum up, GAAP may not be advantageous as it is not comprehensive. But it should not take away the fact that it can help most of the CPA firms through all the outside trading and investment.