What is GAAP? Generally Accepted Accounting Principles.

In this video, we explain GAAP (Generally Accepted Accounting Principles.
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0:00 Introduction
This video explains GAAP (Generally Accepted Accounting Principles) and its importance in ensuring consistency, transparency, and comparability in financial reporting. Here's a quick summary:

What is GAAP? GAAP refers to the rules and standards that companies must follow when preparing financial statements (2:21).
Why is it necessary? GAAP ensures consistency and transparency, which enhances the comparability of financial information for investors, creditors, regulators and other stakeholders (3:02).
Key Principles: GAAP emphasizes relevance and faithful representation in financial reporting (4:43).
Who establishes GAAP? The Financial Accounting Standards Board (FASB) is primarily responsible for establishing and improving accounting standards (6:38). The Securities and Exchange Commission (SEC) oversees the proper use of GAAP by companies (7:38).
International Financial Reporting Standards (IFRS): The International Accounting Standards Board (IASB) sets international accounting standards called IFRS, which are used by most countries outside the U.S. (10:59)




Understanding GAAP: Generally Accepted Accounting Principles
Generally Accepted Accounting Principles (GAAP) is a framework of accounting standards, rules, and procedures defined by the professional accounting industry in the United States. Governed by the Financial Accounting Standards Board (FASB), GAAP aims to ensure consistency, comparability, and integrity in the financial statements of U.S. corporations.

1. Purpose of GAAP
GAAP serves several key purposes in financial accounting:

Consistency: GAAP ensures that financial reporting is performed consistently across all organizations. This consistency helps stakeholders—such as investors, creditors, and regulators—understand and compare financial statements with ease.
Reliability: By adhering to established standards, GAAP ensures the reliability of financial statements. Reliable data help in making investment decisions, lending money, and regulatory oversight.
Transparency: GAAP helps in providing transparency through detailed disclosures in financial statements, making it easier for stakeholders to assess the financial health and practices of a company.
2. Key Principles of GAAP
GAAP is based on several foundational principles that guide how financial statements are prepared:

Accrual Principle: Revenue and expenses are recorded when they are earned or incurred, not necessarily when cash is received or paid. This principle provides a more accurate picture of a company’s financial condition.
Conservatism: Accountants should always err on the side of caution and report the least favorable figures in the face of uncertainty. This ensures that the company’s financial position is not overstated.
Consistency: Once a company chooses an accounting method, it should continue using it consistently from one financial period to another, unless a change is justified.
Going Concern: Financial statements are prepared under the assumption that the business will remain in operation in the foreseeable future.
Matching Principle: Expenses should be matched with revenues in the financial period when the revenue that caused the expense was earned.
Revenue Recognition: Revenue is recognized when it is realized or realizable and earned, not necessarily when received.
3. Components of GAAP Financial Statements
GAAP guidelines affect how the following financial statements are prepared:

Balance Sheet: Shows what a company owns (assets), what it owes (liabilities), and the residual interest in the assets after deducting liabilities (equity).
Income Statement: Also known as the profit and loss statement, it shows the company’s revenues, expenses, and profits or losses over a specific period.
Statement of Cash Flows: Reports the cash inflows and outflows from operating, investing, and financing activities over a period.
Statement of Shareholders’ Equity: Reflects changes in the equity portion of the balance sheet during a reporting period.
4. GAAP vs. IFRS
While GAAP is the standard in the United States, many countries follow the International Financial Reporting Standards (IFRS), which is governed by the International Accounting Standards Board (IASB). Key differences include:

Approach: IFRS often allows more room for interpretation, whereas GAAP is more rule-based.
Inventory Costs: IFRS prohibits the Last In, First Out (LIFO) method for inventory accounting, which is permissible under GAAP.
Fixed Assets: IFRS allows revaluation of plant, equipment, and property, whereas GAAP does not typically allow increases in the value of these assets once they are recognized.







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