What Is GAAP?
Generally Accepted Accounting Principles (GAAP) Definition
Generally Accepted Accounting Principles, or GAAP, is a set of principles, standards, and procedures accountants use when compiling financial statements for publicly traded companies.
Although following GAAP procedure is not required by private companies, it is nonetheless looked upon favorably by lenders and creditors.
10 Principles of GAAP
Issued by the Financial Accounting Standards Board, or FASB, the purpose of GAAP is to provide clarity, consistency, and comparability of financial information across companies.
GAAP follows ten principles, which are:
- Regularity: Adherence to GAAP as a standard
- Consistency: Application of the same standards throughout reporting
- Sincerity: Recording an accurate and impartial report of a company’s financial situation
- Permanence of methods: Using the same standards whenever financial reports are filed
- Non-compensation: Reporting both positives and negatives, without the expectation of debt compensation
- Prudence: Using only fact based, empirical data, rather than speculation
- Continuity: Assuming that the business will continue to operate when valuing assets
- Periodicity: Entries are distributed across appropriate periods of time
- Materiality: Delivering full disclosure in financial reports
- Utmost good faith: Remaining honest when compiling financial reports
Similar Standards – IFRS, FASB
The international equivalent to GAAP are the International Financial Reporting Standards, or IFRS, which are adhered to in over 120 countries.
As more and more businesses enter the global market, the need for truly standardized accounting principles has grown.
Since 2002, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Boards have been working on marrying GAAP and IFRS into a more universal set of procedures.
As such, non-GAAP accounting methods are becoming increasingly common in financial reports, with almost all S&P 500 companies reporting at least one non-GAAP measure in 2018.