GAAP Principles

Generally Accepted Accounting Principles (GAAP) – Explained

The accounting principles refer to the set of rules and regulations that all companies must comply with when they are declaring their financial data. For beginner fund accounting students or those who have a hard time understanding the concept, this topic might sound complicated and even daunting. It is important to therefore consider receiving help from those who are familiar with it; hire a professional accountant or enlist the services of an online accounting homework help service.

To hack all your accounting principles questions, it is important to at least learn the basics and also the importance of accounting. Even though there is yet to be a universally accepted standardized accounting principles framework, most companies rely on similar processes in matters to do with accounting. Some of the common frameworks for accounting are GAAP (US & UK) and IFRS. The outstanding difference between these three is that GAAP is based on rules while IFRS is grounded on principle.


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10 principles of GAAP

Is It Important To Apply Accounting Principles?

Yes, it is. Carrying out the accounting function for a business based on certain laid down principles allows a business owner to communicate to stakeholders in a language that they are familiar with. If financial statements are meant to be published for public scrutiny, accounting principles offer a universal template that makes it easy for people to understand without the need for further clarity. It goes without saying therefore that the use of accounting principles makes financial reports readable to people other than those that prepare them.

From the three accounting principles that are commonly used, how does a company choose which one to use? The choice depends to a large extent on the company law, internal regulations and business characteristics. GAAP represents all the accounting principles in general.

What is GAAP?

The Generally Accepted Accounting Principles (GAAP) refers to the collective principles, guidelines and rules that all companies in the United States adhere to when preparing financial reports. In order to collect and prepare financial statements, that will be easily understood across the economy, the Financial Accounting Standards Board (FASB) in collaboration with the American Institute of Certified Public Accountants (AICPA) established GAAP.

The Impact of GAAP on the Accounting Society

The aim of GAAP is to ensure standardization of accounting practices by regulating the entire accounting cycle. This is achieved through promoting honesty and transparency of companies – achieved by matching their process to a framework that is made available to them. To an accounting professional, accounting principles are the doctrine that guides their accountings systems and procedures.

Providing an accounting principles framework to organizations ensure that businesses abide by a uniform process of recognizing, recording and presenting economic events. For external company stakeholders like agencies, banks and investors who are not around to witness daily operations, it is these accounting principles that shed light into the financial stability of a business. The idea is to provide the correct and relevant data that paints an accurate picture of the performance of an organization.

Ethics also goes in hand with GAAP in accounting. Without accounting ethics, misuse of financial information becomes the order of the day and accountants benefit unfairly from their profession.

The 10 GAAP principles

To have a better understanding of GAAP and its mission of standardizing accounting systems, it is important to familiarize with the 10 principles on which GAAP is based.

1. Principle of Regularity

This principle applies to the accounting professional who handles the financial records and reports. Have they complied with GAAP? It will be near impossible for an organization to be GAAP compliant if the workers are not. This principle matches GAAP regulations and guidelines to the Accountant.

2. Principle of Consistency

This principle provides the guideline to be followed when making entries in financial records. By using it and ensuring that it is maintained every time reporting is done, accounting professionals will avoid discrepancies and errors that may arise as a result of process deviations. In case an accountant deems it necessary to make changes to the guidelines, they are obligated to provide full disclosure on the nature and reasons for the changes.

3. Principle of Sincerity

This principle provides that any depiction of the financial wellbeing of a business by the accountant should be correct. An accountant’s job according to this principle is to report matters as they are and not to paint an impressive picture.

4. Principle of Permanence of Method

This principle focuses on the need to maintain consistency of financial reporting by using the same procedures every time.

5. Principle of Non-Compensation

If the financial reports indicate a negative statement, it should be declared. Some companies do not want to have a negative reflecting on their statements and will go to great lengths to compensate by altering some entries. This principle demands that companies stick to the reports as they have been obtained and refrain from compensating a debt with an asset or revenue with an expense.

6. Principle of Prudence

Financial reports should be based on results obtained from analyzing real data. If there is no data to report, this principle discourages speculation. Accountants are forbidden from speculation or using estimates as data to generate their financial reports.

7. Principle of Continuity

While there is the first day of business, no business sets up with plans of when it is going to end. This principle emphasizes on the importance of treating business operations as an infinite affair. It is based on the assumption that all businesses must aim for a better future.

8. Principle of Periodicity

If a transaction takes place within a certain time period, this should reflect in the financial records. All accounting entries according to this principle must be distributed over the period within which they took place.

9. Principle of Full Disclosure

Regardless of how they affect the financial reports, the accountant must strive to disclose all transactions in full.

10. Principle of Utmost Good Faith

This principle makes the assumption that all parties involved in the various stages of transacting on behalf of a business will remain truthful in their endeavors.

GAAP principles are often used in the preparation of financial reports of large corporations but this does not mean that small companies cannot adopt them as well. If you would like to learn more about how your small business can successfully incorporate GAAP into the accounting process, online accounting hw help tutors can help. Early adoption is the key if you plan to eventually comply to the principles as mentioned above.

More Resources

Explore the additional relevant resources below and learn more.

  1. Prepaid Expenses Journal Entry
  2. Asset Management Ratios
  3. Conversion Cost
  4. Write Off Accounts Receivable
  5. Cannibalization Rate
  6. Net Operating Assets
  7. Substantive Audit Procedures
  8. Predetermined Overhead Rate