Answer Posted / rajesh chandrasekaran

The phrase "generally accepted accounting principles" (or
"GAAP") consists of three important sets of rules: (1) the
basic accounting principles and guidelines, (2) the detailed
rules and standards issued by FASB and its predecessor the
Accounting Principles Board (APB), and (3) the generally
accepted industry practices.

If a company distributes its financial statements to the
public, it is required to follow generally accepted
accounting principles in the preparation of those
statements. Further, if a company's stock is publicly
traded, federal law requires the company's financial
statements be audited by independent public accountants.
Both the company's management and the independent
accountants must certify that the financial statements and
the related notes to the financial statements have been
prepared in accordance with GAAP.

GAAP is exceedingly useful because it attempts to
standardize and regulate accounting definitions,
assumptions, and methods. Because of generally accepted
accounting principles we are able to assume that there is
consistency from year to year in the methods used to prepare
a company's financial statements. And although variations
may exist, we can make reasonably confident conclusions when
comparing one company to another, or comparing one company's
financial statistics to the statistics for its industry.
Over the years the generally accepted accounting principles
have become more complex because financial transactions have
become more complex.

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