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Simple English definitions for legal terms
GAAP
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A quick definition of GAAP:
GAAP stands for Generally Accepted Accounting Principles. It's a set of rules that companies in the United States must follow when preparing and reporting their financial statements. These rules help ensure that financial information is accurate and consistent, making it easier for investors and others to understand a company's financial health. GAAP allows companies to use different accounting methods, but they must disclose which method they use. Publicly traded companies must follow GAAP and report their financial information in a specific way. They can also provide additional information, but it must follow certain rules to avoid misleading investors.
A more thorough explanation:
GAAP stands for Generally Accepted Accounting Principles and refers to the standard accounting rules in the United States. These rules govern how financial statements are prepared, presented, and reported.
For publicly traded companies, GAAP compliance is required by law. This means that companies must follow GAAP rules when reporting their financial performance to investors. However, companies are allowed to issue supplementary, non-GAAP performance reports if they wish.
The Financial Accounting Standards Board (FASB) is responsible for developing the most influential set of GAAP rules in the United States.
One example of GAAP compliance is the use of FIFO and LIFO accounting methods. Another example is the requirement for publicly traded companies to disclose GAAP compliant reports on their annual 10-K.
These examples illustrate how GAAP rules are used to ensure consistency and transparency in financial reporting, which helps investors make informed decisions about where to invest their money.