Definition and Meaning ofGAAP - Term Paper Example

“GAAP is established by the Financial Accounting Standards Board”. (InvestorWords2011) The GAAP first became a popular accounting method in the 1930s and has been a popular method ever since.

GAAP works in many different ways. The GAAP is not a required way of accounting but is preferred by many. GAAP is a way for companies to have their finances written out. The GAAP method is important and helps to insure accuracy and honesty. When businesses use the same accounting method it makes it easy to record and access materials. Statements prepared within this method are prepared with strict standards.

Following standards for the GAAP method make it harder for accountants to have a chance for embezzlement or fraud. Accountants using GAAP as a way to produce statements have very little room for error. When accountants do not use this method is when one should worry about the accuracy of the documents. It is important to remember that GAAP is a set of standards that must be followed. (Investopedia2011)

            Standards and rules for the GAAP are very important for creating financial documents. Financial documents prepared according to this method show accountants a specific way to prepare the documents. The rules show how to show income, loss, and many other accounting statements. There are over 100 rules that show different methods of reporting transactions. These methods are evaluated by the Financial Accounting Standards Board. This board regulates and examines the rules set out by the GAAP.

There are many pros and cons to using the GAAP method. The method offers many positive things to the world of accounting. Before the GAAP there was never really a set method for creating financial documents. The GAAP rules and standards allow those preparing financial documents to prepare documents in the same manner. Preparing documents, in the same manner, can allow other companies to compare documents. If an accountant prepares a company’s documents using the GAAP method and then leaves the company, the new accountant will be able to pick up where the other left off. The GAAP provides convenience to accounting.

Although their and positives regarding GAAP, many can argue the downfalls. There may be too many different regulations to keep up with. The rules and standards are constantly changing and can be hard for all accountants to follow. Changes in standards and rules will have accountants using different methods of GAAP. A recent article describes how “GAAP methods do not fit the needs of all businesses”.(Mccafferty) This is true because some businesses can benefit from the GAAP method and some do not.

It is obvious that a method such as GAAP can benefit businesses by allowing accountants to have a set of rules to follow. The GAAP allows for a form of stability in the finance industry. GAAP may not be accepted by all businesses and accountants but it is a step toward ensuring accurate and honest financial standards.