Define the term Generally Accepted Accounting Principles (GAAP). Why accounting principles are necessary.

OR

Define the term GAAP. Explain the need of GAAP for accounting.

Definition of GAAP — Generally Accepted Accounting Principles (GAAP) refer to the concepts, conventions, rules and standards developed over a period of time which are widely accepted and adopted by accountants. According to Robert Anthony, "the rules and conventions of accounting are commonly referred to as principles." GAAP serve as general guidelines for recording and reporting financial information so that financial statements become comparable and useful to all users.

Need / Importance of GAAP — Accounting principles are necessary for the following reasons:

(a) Identification and Classification — Accounting principles are required to identify and classify economic transactions for meaningful presentation in the financial statements.

(b) Uniformity in Records — These principles ensure uniformity in accounting records. As a result, the financial statements of different firms become comparable, which is essential for investors, creditors and analysts.

(c) Guide to Accountants — Accounting principles serve as a guide to accountants in recording and reporting business transactions in a consistent and accurate manner.

(d) Scientific Approach and Confidence — True and fair financial statements based on GAAP are useful to various users and the use of accounting principles creates confidence in accounting information.

In short, GAAP makes accounting "the language of business" precise, reliable and universally understandable.