GAAP is the acronym for generally accepted accounting principles. In the U.S. that means
the basic accounting principles and guidelines such as the cost principle, matching principle, full disclosure, etc., the detailed standards and other rules issued by the Financial Accounting Standards Board (FASB) and its predecessor the Accounting Principles Board, and generally accepted industry practices.
GAAP must be adhered to when a company distributes its financial statements outside of the company. If a corporation’s stock is publicly traded, the financial statements must also adhere to rules established by the U.S. Securities and Exchange Commission (SEC). This includes having its financial statements audited by an independent CPA firm.
Organizations and entities utilize GAAP standards in order to create financial statements deemed trustworthy by users and potential investors. The information provided in these statements can be used to assess the financial health of an organization, as well as determine how well an organization manages its resources and assets. Because financial statements that follow GAAP practices are generally verifiable by independent third parties, these statements are used to provide the necessary information for users to make determinations such as whether to invest capital, lend or donate money to an organization or company, or assess how well public officials are handling constituents’ tax dollars.