Generally Accepted Accounting Principles, otherwise known as GAAP, is a framework for how to record transactions and create financial statements. While there may be no hard and fast rules when it comes to the conduct of such activities, companies and accountancy firms still follow certain conventions, depending on the type of transaction completed.
One of the most important reasons for why the GAAp must be followed is the need to keep the kind and quality of data produced by different companies consistent. By following the same rules in the recording of transactions, these entities ensure that any comparisons made between any two business entities will be valid.
The Financial Accounting Standards Board or FASB is the body in charge of documenting and declaring the different rules and guidelines under the GAAP. As such, the organization is also responsible for reporting any changes which have been made to ay of the guidelines. It is crucial for such information to be effectively disseminated, because such changes have a direct effect on how companies will go about their financial record-keeping and reporting activities. Naturally, this also affects the way the data looks. Some companies may feel the impact more than others, depending on the nature and financial area affected by the specific adjustment.
It must be noted that the relevance of the GAAP is more marked in the United States. On the level of international business, International Accounting Standards are considered more reliable. As such, this is being adopted by more and more companies, especially those which operate on a global scale.