What is GAAP?
Generally accepted accounting principles or GAAP is a set of standards and principles for financial reporting that are commonly used by all industries in the United States. Organizations use GAAP to:
- Disclose information regarding earnings, profit/loss, and supporting information to investors and the public.
- Summarize and report accounting records into financial statements
- Organize financial information and accounting records
GAAP is commonly used throughout the United States so companies can report their financial statements in a standardized way making it easier to read and compare against other companies. Publicly held companies are required to report their financial statements following GAAP standards.
The 10 GAAP Principles
GAAP helps regulate and standardize accounting for companies both small and large. The goal of GAAP is to create a systematic approach to financial statements and ensuring these statements are consistent with GAAP regulations. The 10 GAAP principles further define the mission of GAAP:
- Principle of Regularity – Accountants must abide by GAAP rules as the financial reporting standard.
- Principle of Consistency – Accountants must apply the same standards throughout the entire report.
- Principle of Sincerity – Accountants must produce accurate and true financial reports.
- Principle of Permanence of Methods – Accountants must use consistent procedures in preparing financial reports.
- Principle of Non-Compensation – Accounts must fully report the company’s performance regardless of positive or negative results.
- Principle of Prudence – Accountants must report based off of facts and not speculation.
- Principle of Continuity – Accountants must assume assets are going to be used continuously.
- Principle of Periodicity – Accountants must report revenues within standard accounting time periods such as fiscal quarters or fiscal years.
- Principle of Materiality – Accountants must fully disclose a company’s monetary situation in the financial report.
- Principle of Utmost Good Faith – Accountants and companies must remain honest in all transactions and reporting.
Using GAAP in Business
With GAAP being the industry standard in the United States, publicly held companies as well as almost all companies report their financial statements using the GAAP standards. In the business world, analysts can compare their company’s performance to other competitors within the industry from a financial standpoint. This analysis can lead to reports on how their company is performing compared to the rest of the market.