What is it?
It is a set of generally accepted accounting principles, collectively known as GAAP. They are basic rules, principles and procedures observed in preparing and presenting a business entity’s financial statements.and prescribed by the Financial Accounting Standards Board (FASB). They were developed for the benefit of external users, who rely on financial statements, as bases for comparisons, analyses and evaluations for their investment decisions.
Adherence to the accounting principles is being required mainly from all public corporations registered and recognized by the Securities and Exchange Commission (SEC). A reference to public corporations denotes companies whose shares of stocks are openly traded in over-the-counter stock markets or stock exchange floors.
Actually, the rules stem from another set of basic accounting principles set forth in accounting academics as fundamental guidelines, which accounting learners have to know by heart. In providing accounting information, there are four basic accounting principles that every learner should keep in mind about financial reporting, these are:
- Relevance or usefulness
- Comprehensibility, and
- Transmissible by way of financial statements.
However, there was one principle lacking, and its importance surfaced at a time when American commerce had started to flourish. Investing in businesses had become a common business activity, in which investors relied on financial statements as financial guides. However, there was no uniformity of accounting procedures applied in the preparation and presentation of the financial statements. Unfortunately, this came into focus only as an aftermath of the stock market crash of 1929 and the Great Depression during the 1930s.