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What is GAAP?

In the United States, Generally Accepted Accounting Principles (GAAP) is the name for the framework of accounting rules used in the preparation of financial statements. GAAP is created by the Financial Accounting Standards Board (FASB).

The goal of GAAP is to make it so that potential investors can compare financial statements of various companies in order to determine which one(s) they want to invest in, without having to worry that one company appears more profitable on paper simply because it is using a different set of accounting rules.

Who is required to Follow GAAP?

All publicly traded companies are required by the Securities and Exchange Commission to follow GAAP procedures when preparing their financial statements. In addition, because of GAAP’s prevalence in the field of accounting —and because of the resulting fact that accountants are trained according to
GAAP when they go through school—many companies follow GAAP even when they are not required to do so.
Governmental entities are required to follow GAAP as well. That said, there are a different set of GAAP guidelines (created by a different regulatory body) for government organizations. So, while they are following GAAP, their financial statements are quite different from those of public companies.

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