What is Generally Accepted Accounting Principles (GAAP)? How does GAAP affect financial reporting? How does GAAP need to change to accommodate today’s dynamic business environment?

The Generally Accepted Accounting Principles is a codification of how CPA firms and corporations prepare and present their business income and expense, assets and liabilities on their financial statements. It is a common set of principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards set by policy boards, it is the commonly accepted ways of reporting and recording accounting information (investopedia). GAAP affects financial reporting by setting the standards that accounts must follow when preparing financial statements. GAAP sets the standards for revenue recognition, outstanding share measurements, and balance sheet reporting. GAAP sets the guidelines for companies whether they use either the cash basis accounting or accrual based accounting methods for reporting their financial statements. GAAP determines what transactions are recognized within the assets, liabilities, and equity accounts. GAAP needs to change to accommodate today’s dynamic business environment by allowing international accounting and financial standards to converge with its standards. GAAP is designed solely for the US and the IFRS is a globally accepted set of guidelines. In order for GAAP to keep up with changing business it must become globally accepted. There is a need for globally accepted principles and the FASB Accounting Standards Codification system may be the way to accomplish this goal.

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