Generally accepted accounting principles (GAAP)

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The term "generally accepted accounting principles" or GAAP refers to the body of principles that governs the accounting for financial transactions underlying the preparation of a set of financial statements.[1]

The American Institute of Certified Public Accountants (AICPA) code of professional conduct prohibits members from expressing an opinion or stating affirmatively that financial statements or other financial data "present fairly... in conformity with generally accepted accounting principles," if such information contains any departures from accounting principles promulgated by a body designated by the AICPA council to establish such principles. [2]

The AICPA council designated the Federal Accounting Standards Advisory Board (FASAB) as the body that establishes accounting principles for federal entities. The AICPA's hierarchy of generally accepted accounting principles in Statement of Auditing Standards No. 91, governs what constitutes GAAP for U.S. government reporting entities.[3]

The use of GAAP is important, because companies that use GAAP when making their financial data reports will have mostly consistent ways of displaying the data.

Major Components

GAAP includes hundreds of different components, but here are a few of the most important.[4]:

Resources

As directed by the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission (SEC) adopted new rules and amendments to address public companies' disclosure or release of certain financial information that is calculated and presented on the basis of methodologies other than in accordance with generally accepted accounting principles (GAAP).

References

  1. The 'Lectric Law Library's Lexicon On Generally Accepted Accounting Principles (Gaap). The Lectric Law Library.
  2. AICPA Code of Professional Conduct. AICPA.
  3. Generally Accepted Accounting Principles. FASB.
  4. GAAP (Generally Accepted Accounting Principles). Stanford.edu.