By DeVry University
Generally Accepted Accounting Principles, more widely known as GAAP, are a set of guidelines and rules that all companies and accountants in the United States adhere to. These rules are set by the Financial Accounting Standards Board (FASB) and American Institute of Certified Public Accountants (AICPA) in order to ensure that accounting information is reported fairly and accurately.
In this article, you'll learn more about the generally accepted accounting principles that make up GAAP as we explore the following sections (jump to):
Basic Accounting Principles
GAAP encompasses several different accounting principles, each of which plays a vital role in the accurate reporting of a company's financial data. These principles aim to minimize the potential for errors.
In this section, we'll explore these principles and explain both what they mean and why they are so important for the field of accounting.
Principle of Regularity
The principle of regularity requires that accountants use an established system for their reporting. This principle is critical as it prevents accountants from simply doing whatever feels convenient in the moment and leaving other parties to figure out the logic behind their reports.
Principle of Consistency
The principle of consistency requires that whatever system you choose is to be used universally across all of your accounting work. For instance, if you choose to use GAAP, then you must use GAAP across all of your reporting rather than switch back and forth between GAAP and IFRS.
Principle of Sincerity
This principle ensures that the accountant preparing the report is not trying to trick or mislead anyone by misrepresenting the data. It requires that all the data in the report is – to the best of the accountant's knowledge – accurate and true.
Principle of Permanence of Methods
This principle requires accountants to treat accounting like a science, so that one person’s work should be replicable by another party using the same method. The principle of permanence of methods ensures that the work can be double-checked with relative ease and efficiency.
Principle of Non-Compensation
The principle of non-compensation promises that you will not use offsetting accounts to cover up or hide any facts. In particular, it prohibits hiding debts behind assets and costs behind revenue.
Principle of Prudence
This principle asserts that accountants should only report facts. Accounting does not operate in the realm of conjecture or speculation and should only include concrete data in reports.
Principle of Continuity
The principle of continuity states that the accountant preparing a report should assume that the business will continue to operate as it has been operating for the foreseeable future.
Principle of Periodicity
This principle ensures that accountants only report revenue within standard intervals, such as quarterly or yearly. This provides businesses with an accurate financial status from that timeframe so they can use the information to make decisions about the future.
Principle of Materiality
The principle of materiality states that all financial data should be laid out in a report that is GAAP compliant. It primarily exists to make sure that no information is omitted from the report.
Principle of Utmost Good Faith
Finally, the principle of utmost good faith requires that an accountant will always tell the truth and operate in good faith as part of their duties.
Why is GAAP Important for Businesses?
GAAP is important for businesses because it sets a standard for how financial reports are organized and how reporting is carried out by accountants. Without a standard set of expectations, accountants could present reports in whatever format they please, including formats of their own design. This would make it difficult to verify whether or not the information was factual.
Additionally, the Generally Accepted Accounting Principles prevent accountants from breaking reporting laws at the behest of their clients, superiors or others within their company. These principles also make it significantly more difficult for a rogue accountant to get away with misreporting information, as the standardized reporting method makes it easier to identify areas where data is missing or where facts have been misrepresented.
GAAP vs. IFRS
Both GAAP and the International Financial Reporting Standard (IFRS) are widely accepted systems of accounting principles that enable internal and external bodies to quickly understand the work that the accountant has performed. In general, these two systems set out to accomplish similar goals, but they do have a few differences.
One of the first and most notable differences is where each system is used. GAAP is used primarily within the U.S., while the IFRS is used in the European Union and some countries in Asia and South America.
Beyond that difference, GAAP is more rules-based while IFRS is more principle-based. This typically becomes more obvious when looking at each framework. For instance, the IFRS guidelines are generally less specific or detailed than GAAP’s, but the consistency of the principles behind IFRS may give a more accurate picture of economic transaction within the business world.
No matter which accounting system is being used, both GAAP and IFRS play a crucial role in regulating accounting reports around the world.
Learn More About Generally Accepted Accounting Principles
Thinking about a career in accounting? At DeVry, we offer several accounting degree programs such as a Bachelor's Degree in Accounting, Master's Degree in Accounting or an MBA with a Specialization in Accounting. Our classes are taught by knowledgeable faculty with experience in the accounting field who can help you learn to tackle real-world situations.
If you're interested in learning more about GAAP, as well as other accounting principles, our classes start every 8 weeks.