Generally Accepted Accounting Principles (GAAP)

What Are Generally Accepted Accounting Principles (GAAP)?

Generally accepted accounting principles (GAAP) refer to a common set of accounting principles, standards, and procedures is

KEY TAKEAWAYS
GAAP is the set of accounting principles set forth by the FASB that U.S. companies must follow
GAAP aims to improve the clarity, consistency, and comparability of the communication of finan
GAAP may be contrasted with pro forma accounting, which is a non-GAAP financial reporting m
The ultimate goal of GAAP is to ensure a company's financial statements are complete, consiste
There are 10 key concepts that guide the principles of GAAP.
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GAAP

Understanding GAAP
GAAP is a combination of authoritative standards (set by policy boards) and the commonly accepted ways of record
to improve the clarity, consistency, and comparability of the communication of financial information.

GAAP may be contrasted with pro forma accounting, which is a non-GAAP financial reporting method. Internationall
as International Financial Reporting Standards (IFRS). IFRS is currently used in 166 jurisdictions.2

GAAP helps govern the world of accounting according to general rules and guidelines. It attempts to standardize an
used in accounting across all industries. GAAP covers such topics as revenue recognition, balance sheet classificat

The ultimate goal of GAAP is to ensure a company's financial statements are complete, consistent, and comparable. This make

10 Principles of GAAP
There are 10 general concepts that lay out the main mission of GAAP.

1. Principle of Regularity

The accountant has adhered to GAAP rules and regulations as a standard.

2. Principle of Consistency

Accountants commit to applying the same standards throughout the reporting process, from one period to the next,
Accountants are expected to fully disclose and explain the reasons behind any changed or updated standards in the

3. Principle of Sincerity

The accountant strives to provide an accurate and impartial depiction of a company’s financial situation.

4. Principle of Permanence of Methods

The procedures used in financial reporting should be consistent, allowing a comparison of the company's financial in

5. Principle of Non-Compensation

Both negatives and positives should be reported with full transparency and without the expectation of debt compens

6. Principle of Prudence

This refers to emphasizing fact-based financial data representation that is not clouded by speculation.

7. Principle of Continuity

While valuing assets, it should be assumed the business will continue to operate.

8. Principle of Periodicity

Entries should be distributed across the appropriate periods of time. For example, revenue should be reported in its relevant  a

9. Principle of Materiality

Accountants must strive to fully disclose all financial data and accounting information in financial reports.

10. Principle of Utmost Good Faith

Derived from the Latin phrase uberrimae fidei used within the insurance industry. It presupposes that parties remain

Compliance With GAAP

If a corporation's stock is publicly traded, its financial statements must adhere to rules established by the U.S. Secur
requires that publicly traded companies in the U.S. regularly file GAAP-compliant financial statements in order to rem
compliance is ensured through an appropriate auditor's opinion, resulting from an external audit by a certified public

Although it is not required for non-publicly traded companies, GAAP is viewed favorably by lenders and creditors. Most financ

If a financial statement is not prepared using GAAP, investors should be cautious. Without GAAP, comparing financ
extremely difficult, even within the same industry, making an apples-to-apples comparison hard. Some companies m
reporting their financial results. GAAP regulations require that non-GAAP measures be identified in financial stateme
releases.