Short definition: GAAP, or Generally Accepted Accounting Principles, is a set of accounting standards and procedures that companies use to prepare their financial statements.
Explanation: GAAP provides a common framework for financial reporting, ensuring consistency, comparability, and transparency across different companies and industries. These principles cover various aspects of accounting, including revenue recognition, expense recognition, asset valuation, and liability measurement.
Example: Under GAAP, a company must recognize revenue when it is earned, not when cash is received. This ensures that revenue is reported in the period in which it is actually generated, providing a more accurate picture of a company’s financial performance.
Additional information (optional): GAAP is primarily used in the United States, while International Financial Reporting Standards (IFRS) are used in many other countries. While there are some differences between GAAP and IFRS, both sets of standards aim to provide a reliable and consistent framework for financial reporting.