What is GAAP?

Generally accepted accounting principles or GAAP refers to the standardized rules and regulations of accounting that businesses must adhere to when they compile their financial statements.

GAAP should not be mixed up with International Financial Reporting Standards or IFRS which dictates international accounting standards that companies must follow.

In the United States, GAAP provides the framework within which financial records need to be recorded by companies both big and small.

GAAP sets the minimal accounting standards that have to be followed by enterprises. This helps ensure consistency and makes it easier for investors to assess the financial health of companies within the United States.

The 10 General Principles

Here are the 10 general principles that make up the GAAP -

1. Principle of Regularity - The accountant is utilizing GAAP.
2. Principle of Consistency - The accountant is committed to using the same standards throughout the financial reporting process.
3. Principle of Sincerity - Accountant is working to the best of his ability in providing accurate financial statements.
4. Principle of Permanence of Methods - Process used in providing financial records should be consistent.
5. Principle of Non-Compensation - Negatives and positives need to be disclosed, with transparency. Don't expect the debt to be compensated.
6. Principle of Prudence - Relying on fact-based data, avoiding speculation.
7. Principle of Continuity - When valuing assets, it should be done under the assumption that the business will continue to operate.
8. Principle of Periodicity - All entries that are entered should be allotted to their respective time period.
9. Principle of Good Faith - Accountants need to strive for full disclosure of all relevant financial information.
10. Principle of Utmost Good Faith - Parties remain honest in all financial transactions.