It’s important to learn and understand the GAAP principles and how they influence the accounting profession. Each of the following 10 key principles of GAAP plays a vital role in the accurate reporting of a company's financial data, and the accounting occupation as a whole.
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 a company selects one method of depreciating its assets, it must then consistently use that method, instead of changing methods from one accounting period to the next.
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 impartial.
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 an accountant will not use offsetting accounts to cover up or hide any facts. It particularly prohibits hiding debts behind assets and costs behind revenue. It also requires that corporations utilize full disclosure when presenting their financial statements.
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 its 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 time frame 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 in the execution of their duties.