How Was GAAP Developed?
The Generally Accepted Accounting Principles (GAAPs) are a set of principles by which all American Certified Public Accountants (CPAs) must abide. These rules were first established in 1936 by the American Institute of Accountants, and were continuously developed by various boards and associations. Today, GAAP is defined by nine general principles concerning acceptable accounting practices.
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Identification
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The Generally Accepted Accounting Practices are a list of rules that guide all Certified Public Accountants who do business in the United States of America. The main purpose of GAAP is to maintain some type of order in the way American-based companies do their accounting. Ethical reporting of earnings or losses is expected of companies under GAAP.
The Need for GAAP
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The public began getting more and more concerned with accounting practices after the Great Depression of the late 1920s and early 1930s. As the government strove to regain the public's confidence in the markets by establishing the SEC (Securities and Exchange Commission), and as businesses moved away from industrial manufacturing more toward professional services, people wanted to know that they were getting accurate reporting of how companies were doing. The SEC's job was to hold companies responsible for full disclosure of financial information.
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Early Committees
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In 1936, the American Institute of Accountants (AIA) was the first to coin the phrase "generally accepted accounting practices." They published various pamphlets and articles on the topic of GAAP and were soon considered the authorities on the subject. The SEC originally decided to rely on the AIA for these standards.
The AIA guided the nation as the Committee on Accounting Procedures (CAP) on issues of accounting principles until the Institute eventually evolved into the American Institute of Certified Public Accountants (AICPA). In 1959, the AICPA established the Accounting Principles Board (APB), a committee made up of 21 members, which included 8 representatives from the Big Eight accounting firms in existence at the time. This board continuously updated and added new principles to the list of Generally Accepted Accounting Principles for public accounting firms to follow.
The SEC Steps In
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But in the early 1970s, some of the Big Eight firms became concerned about the neutrality and soundness of the APB and their decisions about GAAP. Because of all the questions and a study by The Wheat Study Group (which was appointed by the APB), the American Institute of Certified Public Accountants had to give up its duties regarding GAAP to the SEC-appointed Financial Accounting Standards Board (FASB). The SEC saw the need for the non-profit FASB to step in as a more effective alternative to the AICPA's board.
Today
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Nowadays, the SEC appointed Financial Accounting Standards Board is still responsible for setting and maintaining GAAP, which is currently made up of nine main principles: full disclosure, periodicity, continuity, prudence, non-compensation, permanence, sincerity, consistency and regularity. These principles are meant to give investors and other stakeholders confidence in the accounting activities of the companies in which they hold stakes.
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