Generally Accepted Accounting Principles (GAAP)

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What Are the Generally Accepted Accounting Principles (GAAP)?

Generally accepted accounting principles (GAAP) refer to a common set of accounting rules, standards, and procedures issued by the Financial Accounting Standards Board (FASB). Public companies in the U.S. must follow GAAP when their accountants compile their financial statements.

GAAP is guided by ten key tenets and is a rules-based set of standards. It is often compared with the International Financial Reporting Standards (IFRS), which is considered more of a principles-based standard. IFRS is a more international standard, and there have been recent efforts to transition GAAP reporting to IFRS.[1]

Generally accepted accounting principles, or GAAP, are standards that encompass the details, complexities, and legalities of business and corporate accounting. The Financial Accounting Standards Board (FASB) uses GAAP as the foundation for its comprehensive set of approved accounting methods and practices.

U.S. law requires businesses releasing financial statements to the public and companies publicly traded on stock exchanges and indices to follow GAAP guidelines. GAAP incorporates the following 10 concepts:

10 GAAP PrinciplesPrinciple of Regularity:GAAP-compliant accountants strictly adhere to established rules and regulations.Principle of Consistency:Consistent standards are applied throughout the financial reporting process.Principle of Sincerity:GAAP-compliant accountants are committed to accuracy and impartiality.Principle of Permanence of Methods:Consistent procedures are used in the preparation of all financial reports.Principle of Non-Compensation:All aspects of an organization's performance, whether positive or negative, are fully reported with no prospect of debt compensation.Principle of Prudence:Speculation does not influence the reporting of financial data.Principle of Continuity:Asset valuations assume the organization's operations will continue.Principle of Periodicity:Reporting of revenues is divided by standard accounting periods, such as fiscal quarters or fiscal years.Principle of Materiality:Financial reports fully disclose the organization's monetary situation.Principle of Utmost Good Faith:All involved parties are assumed to be acting honestly. GAAP compliance makes the financial reporting process transparent and standardizes assumptions, terminology, definitions, and methods. External parties can easily compare financial statements issued by GAAP-compliant entities and safely assume consistency, which allows for quick and accurate cross-company comparisons.

Because GAAP standards deliver transparency and continuity, they enable investors and stakeholders to make sound, evidence-based decisions. The consistency of GAAP compliance also allows companies to more easily evaluate strategic business options.[2]

Generally Accepted Accounting Principles (GAAP or US GAAP) are a collection of commonly-followed accounting rules and standards for financial reporting. The specifications of GAAP, which is the standard adopted by the U.S. Securities and Exchange Commission (SEC), include definitions of concepts and principles, as well as industry-specific rules. The purpose of GAAP is to ensure that financial reporting is transparent and consistent from one organization to another.[3]

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