in this video we're going to talk about gap so gap stands for generally accepted accounting principles and basically what gap is as gap is a common set of rules and principles and standards that companies have to follow when they're putting together their financial statements for external users and once I say external users it could be the government is one of the external users it could be a potential investor or current investor a creditor like a bank or something like that and so this company they're putting together these financial statements and so this is actually pertains to financial accounting when someone's talking about GAAP they're not talking about management accounting they're not saying about tax we're talking about financial accounting so like putting together income statement balance sheet and so forth they're putting out these public disclosures these these financial statements and they need to follow a common set of rules so that when an investor is looking at two different companies and they're trying to compare them and make an investment decision they can know that okay these financial statements we're put together based on the same set of rules it's not like one company's following one set of rules that they made up on their own and other companies following a completely different set of rules that would make it really hard for investors to allocate capital and decide how to invest so let me give you an example here so let's say that we've got two companies they're both appliance stores so they sell like a lot of laundry for example a dryer a washer let's say a dishwasher for washing dishes so we've got Santa Claus appliance store and then we've got the naughty elf appliance store so each of these appliance store they sell a dishwasher on credit so that means the person doesn't pay cash the customer doesn't pay cash they just say I promise to pay later so they buy a dishwasher on credit for $700 each of these stores has the exact same transaction right so just Santa Claus does this and then naughty elf does it and let's just assume everything else is the same right let's not let's assume that it's just the same level of risk with each customer don't the whole nine yards right this is a basic sale on credit so we would expect that these these both these companies were recognized a sale of $700 right once once they've shipped out the dishwasher delivered it to the customer and so forth right and we'll talk about that in future videos about when you'd actually recognize a sale but let's leave all that aside basic ideas there's a sale on credit of something for $700 each of these companies should be recognizing that hey we have this sale and so we don't want to have a situation where for example let's say Santa Claus said well actually we haven't received it in cash yet so we decided we don't want to recognize a sale we'll wait till we actually receive the cash that's actually called cash basis accounting and you can't do that because we have to follow what's called accrual accounting and we'll talk about that more later but the idea is that we have to have a common set of rules here where we say okay look each of these stores if one is recognizing the sale then the other one has to be recognizing the sale if they're following the same framework of accounting rules now it can get a little tricky because we might get into things about like okay well what are the chances that this person who bought on credit will actually pay do we need to protect a set up an account to acknowledge it some of these credit sales won't be collected and then there's different methods that you can use you can use the aging of accounts receivable I could use percentage of sales don't worry about all that we'll talk about that in the videos to come but the the main idea is that even though we have this common set of rules where some of the basic things it's like okay the companies have to follow these same rules there's some there's some flexibility in there in terms of which methods that the stores can use however that being said all those methods everything has to be GAAP right they can't just make up their own stuff it has to follow this common set of rules now that being said what is GAAP depends on and where you are right so your country is going to decide do they want to make up their own GAAP which we refer to as local gap so the United States for example they have their own GAAP right so they have they have this board called the Financial Accounting Standards Board the FASB and they make they basically have this accounting staff Anders codification so the fast be they make the accounting rules right through this private agency they make the accounting rules in the US and that that is the gap for the US right so the generally accepted accounting principles in the US are made by the FASB however there's also international financial reporting standards right so you think about that is international GAAP and over a hundred company our countries have adopted IFR