Generally Accepted Accounting Principles (GAAP)

If every accountant were free to record and report transactions however they liked, financial statements from different businesses could never be compared, and even the same business's figures could not be trusted from one year to the next. Generally Accepted Accounting Principles (GAAP) are the common rules, procedures and conventions that accountants everywhere follow so that financial statements are prepared on a uniform, understandable and comparable basis.

GAAP is not one single rulebook handed down from above — it is built up from three layers that work together:

• Accounting Concepts — the basic assumptions on which accounting rests (e.g. that a business is separate from its owner, or that it will continue indefinitely).
• Accounting Conventions — customs and traditions followed by accountants over time (e.g. being conservative when in doubt, or disclosing everything material).
• Accounting Standards — formal, written rules issued by a regulatory/professional body (in India, the Institute of Chartered Accountants of India, ICAI) that make the concepts and conventions specific and mandatory for particular situations.

This three-layer structure is exactly why financial statements prepared by two completely unrelated companies can still be read, trusted and compared by an investor — both are built on the same conceptual foundation, whichever board they follow.