Gaap definition advantages and disadvantages of gaap
Answers
Definition
GAAP is a term that refers to a set of rules, standards and practices used throughout the accounting industry to prepare and standardize financial statements that are issued outside the company.
Advantage
•GAAP guidelines help businesses
maintain consistency in their presentation of financial information, reduce the risk of misrepresentation and avoid fraud.
• GAAP was created to safeguard the rights of stakeholders, including investors. It holds companies responsible for their financial reporting activities, thus providing greater assurance to all interested parties. •Through the use of GAAP guidelines, companies provide true and fair presentation of financial information.
disadvantages
•GAAP accounting provides management with a lot of tools in presenting the companies financial position. Such treatments for depreciation, deferred taxes, and amortization for R&D to name a few can be altered to present a smoothed picture of a company. The reality is companies do not operate this way. They are subject to the whims and flows of changing consumer demand, external economic fundamentals, constraints in managing their scarce capital.
•As a result GAAP accounting is limited in that doesn’t necessarily present the economic reality the company is operating.
• GAAP accounting nudges companies to prepare financial statements that appeal to creditors rather than shareholders. For equity investors, GAAP accounting provides a manipulated and not necessarily accurate snapshot of the companies financial position and performance
GAAP
GAAP is an aggregate of conventional criteria established by management committees and the generally affirmed methods of registration and communicating accounting knowledge. GAAP enhances the accuracy of the presentation of financial information.
Advantage of GAAP is an encouragement in professional judgment.
Accounting policies demand analysts to inquire deeper into the material of the business. This increases sound trained judgment in the declaration and inspires more of an understanding of efficiency.
Its disadvantage is decreased Comparability.
If policies are applied rather than commands, accounting data may begin to become less compatible. Two organizations with similar assets, in this illustration, could present them separately on the balance sheet.