This principle requires that accountants and anyone involved in financial reporting will act with honesty and in good faith. Principle of SincerityĪccountants should report a company’s financial position with honesty and accuracy. Principle of RegularityĪll accountants are to consistently adhere to GAAP rules and regulations as a standard. Principle of PrudenceĪll reporting of financial data must be factual and not speculative. In other words, the company should not offset, or compensate for, debt with an asset. This principle requires that all aspects of a company’s performance are to be reported, whether positive or negative. If methods are changed, accountants must fully disclose the changes and explain their reasoning for doing so. Similar to the principle of consistency, this principle requires accounting and financial reporting to adhere to the same methods. This principle ensures comparability by following standards in financial reporting from period to period. There are 10 GAAP principles guiding the rules and procedures outlined by the Financial Accounting Standards Board (FASB). With uniform accounting standards required for public companies to follow, stakeholders and government agencies can more easily understand financial statements and compare performance metrics between companies. The goal of GAAP is to standardize accounting principles and practices so that corporate accounting and reporting may be transparent and consistent. Multiple agencies have been created throughout the years to enforce these rules, but the FASB has supervised GAAP since 1973. The desire to have established accounting standards stemmed from the market crash of 1929. Generally accepted accounting principles (GAAP) are accounting principles issued via the Financial Accounting Standards Board (FASB) in the United States. Investors should take notice when metrics are non-GAAP because they have the potential to be misleading. Important: A company may report non-GAAP metrics because they believe the GAAP rules are not flexible enough to handle their company’s specific operations. Although companies are allowed to present Non-GAAP metrics, the reporting company must disclose to investors that these additional metrics do not follow the rules and are open to interpretation. Non-GAAP metrics are used in corporate accounting as alternatives or supplements to GAAP. Failure to follow these accounting principles can result in a public company being removed from the public exchange. However, the Security Exchange Commission ( SEC) has required that all public companies in the United States follow the GAAP rules when reporting financial statements. Note: The use of GAAP is not mandatory for all businesses. For example, what is considered revenue, which line item Research and Development costs fall under, or what is allowed to be considered a depreciating asset. These general accounting principles are set to standardize accounting definitions, assumptions, and methods when it comes to calculating finances. GAAP specifications include definitions, concepts, and principles that are intended to ensure that financial reporting is transparent, consistent, and comparable across organizations. They are rules and procedures established to govern corporate accounting in the United States. GAAP stands for generally accepted accounting principles. Hirun/iStock via Getty Images What Is GAAP in Accounting?
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