What is the primary purpose of GAAP?

The primary purpose of Generally Accepted Accounting Principles (GAAP) is to ensure that financial reporting provides relevant and meaningful information that helps users assess an entity's financial position and performance. This framework establishes a set of standards and guidelines that facilitate consistency and transparency in financial statements. By adhering to GAAP, organizations can prepare their financial reports in a manner that is understandable and comparable, allowing stakeholders—such as investors, regulators, and creditors—to make informed decisions based on reliable financial data.

While the assessment of an entity’s finances is a critical function, it is important to note that GAAP also serves to standardize financial reporting. This standardization supports the comparability of financial statements across different organizations, which is essential for stakeholders seeking to evaluate performance or investment opportunities. However, the essence of GAAP lies in enhancing the usability of financial reporting for stakeholders’ assessments, rather than being a set of tax guidelines or merely restricting the types of reports produced.