All About GAAP: 10 Generally Accepted Accounting Principles

Generally accepted accounting principles (GAAP) are a set of principles that establishes consistent standards and procedures for accountants in the United States, governing areas such as revenue recognition, matching principles, going concern, accrual, and disclosure. The purpose of GAAP is to create a common accounting language across different companies and fields.

In the US, federal law requires public companies to be GAAP-compliant when compiling or publishing financial information; private companies may choose whether to opt-in or out. The GAAP standards are recognized, regulated, reviewed, or revised by several institutions, including the non-profit Financial Accounting Standards Board (FASB), the American Institute of Certified Public Accountants (AICPA), the Governmental Accounting Standards Board (GASB), and the US Securities and Exchange Commission (SEC).

Outside of the US, countries follow a similar set of rules and standards called IFRS, or the International Financial Reporting Standards, issued by the International Accounting Standards Board (IASB).

The purpose of the US GAAP rules is to create a common accounting language across companies and business concentrations, which:

• Increases the readability of accounting statements. When financial reports follow the same accounting methods and guidelines—including format and hierarchy of information—they become much easier to understand and digest than if every company followed its own set of rules.
• Improves the quality of financial reports. By implementing information requirements and a designated hierarchy of financial data and sources into accounting practices, GAAP greatly improves the individual quality of each financial statement, making them more reliable and robust.
• Helps investors compare companies. A common language across accounting records makes it much easier for accountants, shareholders, lenders, business owners, and other interested parties to compare different companies’ accounts. Using a common language improves the quality and comparability of information and helping investors make more informed investment decisions.

GAAP compliance is founded on 10 basic principles to help accountants ensure consistency in their financial reporting:

• Consistency: The principle of consistency states that accountants will apply standards consistently throughout the process of reporting (both in each report and throughout multiple years of reporting), rather than choosing when to follow or diverge from GAAP.
• Continuity: The principle of continuity states that accountants operate under the assumption that the institution will continue to operate under its current practices, which has a major effect on the value of its assets.
• Materiality: The principle of materiality states that accountants will commit to full disclosure rather than obscuring certain facts or leaving information out of their reports.
• Non-compensation: The principle of non-compensation states that accountants should commit to full disclosure of the facts—both good and bad—surrounding their institution’s finances and cash flow.
• Periodicity: The principle of periodicity states that accountants will commit to regular reporting according to a predetermined period, usually a set fiscal year or fiscal quarter system.
• Permanence of methods: The principle of permanence of methods is an additional commitment to regularity and consistency, emphasizing the need for reports to be comparable between different companies and fields.
• Prudence: The principle of prudence states that accountants will stick to a conservative, fact-based approach to financial results rather than indulging in speculation or opinionated judgments.
• Regularity: The principle of regularity states that accountants will strictly follow the standards and regulations of GAAP accounting.
• Sincerity: The principle of sincerity states that accountants will be impartial and accurate when reporting the company’s finances.
• Utmost good faith: The principle of utmost good faith, from the Latin uberrimae fidei, states that in financial reporting, all parties should assume that the other parties are acting honestly.

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