Question

Accounting discussion!

Please answer this:

After the Great Depression, Congress created the SEC, an agency tasked with overseeing public companies. Shortly thereafter, the Financial Accounting Standards Board (FASB) , operating under the SEC created GAAP, Generally Accepted Accounting Principles.  Explain the benefits accruing to financial statement users of GAAP-compliant financial statements.

Answer 1

Generally accepted accounting principles are common set of rules, procedures and conventions and provide broad guidelines for accounting practices. GAAP tries to address the objectives of recording, measurement ,disclosure and presentation of monetary transactions and financial statements. GAAP primarily has two principles i.e. the recognition and disclosure principle. The recognition principle deals with the transactions that are accounted for and includes monetary values only. Disclosure principle is the monetary and non monetary aspects of financial statements that enable decision making for the users. Financial statements that are GAAP compliant tend to be more reliable and enable comparability with the statements of other companies that are GAAP compliant as well. GAAP mandates consistency principle i.e. same accounting principles have to be applied year after year which leads to fair presentation and comparability of the company's financial statements over years. Ensuring GAAP principles serves the actual purpose of an external audit i.e. true and fair presentation of the financials.