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Generally accepted accounting principles, or GAAP, are standards that encompass the details, complexities, and legalities of business and corporate accounting. The Financial Accounting Standards Board (FASB) uses GAAP as the foundation for its comprehensive set of approved accounting methods and practices.
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GAAP incorporates three components that eliminate misleading accounting and financial reporting practices: 10 accounting principles, FASB rules and standards, and generally accepted industry practices.
These components create consistent accounting and reporting standards, which provide prospective and existing investors with reliable methods of evaluating an organization's financial standing. Without GAAP, accountants could use misleading methods to paint a deceptive picture of a company or organization's financial standing.
The Great Depression in 1929, a financial catastrophe that caused years of hardship for millions of Americans, was primarily attributed to faulty and manipulative reporting practices among businesses. In response, the federal government, along with professional accounting groups, set out to create standards for the ethical and accurate reporting of financial information.
Small businesses may also struggle with implementing GAAP. These standards may be too complex for their accounting needs, and hiring personnel to create GAAP definition reports can be expensive. As a result, the FASB works with the Private Company Council to update GAAP with private company exceptions and alternatives.
Since the U.S. does not fully comply with IFRS, global companies face challenges when creating financial statements. Even though the FASB and IASB created the Norwalk Agreement in 2002, which promised to merge their unique set of accounting standards, they have made minimal progress. In an effort to move towards unification, the FASB aids in the development of IFRS.
The FASB and IASB want to merge their standards because they share the goal of pursuing accounting integrity. While each financial reporting framework aims to provide uniform procedures and principles to accountants, there are notable differences between them.
So it was felt that certain minimum standards should be universally applicable, so that the accounting statements have the qualitative characteristics of reliability, relevance, understandability and comparability.
Accounting standards are written statements, issued from time-to-time by institutions of accounting professionals, specifying uniform rules or practices for drawing the financial statements.
2.To improve reliability of the financial statement: Accounts prepared by using accounting standards are reliable for various users, because these standards create a sense of confidence among the users. 076b4e4f54