Generally Accepted Accounting Principles GAAP Guidelines & Policies

Without GAAP, comparing financial statements of different companies would be extremely difficult, even within the same industry, making an apples-to-apples comparison hard. Some companies may use both GAAP and non-GAAP measures when reporting their financial results. GAAP regulations require that non-GAAP measures be identified in financial statements and other public disclosures, such as press releases. GAAP is a combination of authoritative standards set by policy boards and the commonly accepted ways of recording and reporting accounting information. GAAP covers such topics as revenue recognition, balance sheet classification, and materiality. This refers to cash or cash equivalent that was paid to purchase an item in the past.

  • Some of these are discussed later in this book, but other are left for more advanced study.
  • This GAAP principle states that the reporting process should be standardized and that all items should be entered the same way they are fixed.
  • It also includes relevant Securities and Exchange Commission (SEC), guidance that follows the same topical structure in separate sections in the Codification.
  • Any company following GAAP procedures will produce a financial report comparable to other companies in the same industry.

The objectivity principle is, in part, the reason many companies will have an independently audited set of financial statements produced on a routine basis. Under the matching principle, sales and the expenses used to produce those sales are reported in the same accounting period. These expenses can include wages, sales commissions, certain overhead costs, etc.

Revenue Recognition Principle

US securities law requires all publicly-traded companies, as well as any company that publicly releases financial statements, to follow the GAAP principles and procedures. In the United States, generally accepted accounting principles (GAAP) are regulated by the Financial Accounting Standards Board (FASB). In Europe and elsewhere, International Financial Reporting Standards (IFRS) are established by the International Accounting Standards Board (IASB). When accounting principles allow a choice among multiple methods, a company should apply the same accounting method over time or disclose its change in accounting method in the footnotes to the financial statements.

  • All financial statements have to indicate the time period for the activity reported in order for them to be meaningful to those reviewing them.
  • Securities and Exchange Commission (SEC)[1] and is the default accounting standard used by companies based in the United States.
  • Thus, in 1959, the AICPA created the Accounting Principles Board (APB), whose mission it was to develop an overall conceptual framework.

It’s important here for the accountant to be empowered to use their professional opinion. Since businesses come in all sizes, an amount that might be significant, or material for one business may be insignificant, or immaterial for another. The monetary unit assumption states all business activity must be recorded in the same currency.


However, this problem-by-problem approach failed to develop the much needed structured body of accounting principles. Thus, in 1959, the AICPA created the Accounting Principles Board (APB), whose mission it was to develop an overall conceptual framework. Any financial statement must accurately reflect all of the company’s assets, expenses, liabilities and other financial commitments.


The Principle of Materiality dictates that accountants must strive for full disclosure of a company’s monetary situation. This principle prevents companies from omitting any information from their financial reports regardless of whether it casts the company in a positive or negative light. Concepts Statements guide the Board in developing sound accounting principles and provide the Board and its constituents with an understanding of the appropriate content and inherent limitations of financial reporting. Generally accepted accounting principles (GAAP) are uniform accounting principles for private companies and nonprofits in the U.S. These principles are largely set by the Financial Accounting Standards Board (FASB), an independent nonprofit organization whose members are chosen by the Financial Accounting Foundation. GAAP is the set of accounting guidelines used for every publicly traded company in the United States.

What Are the Principles of Accounting?

The Principle of Periodicity dictates that financial reports must be released based on a pre-determined schedule such as every fiscal quarter or fiscal year. This principle prevents companies from refusing to share financial information during periods where the company’s performance is suffering. The FASB is an independent board that was formed in 1973 for the specific purpose of taking over GAAP determinations and updates. It is today comprised of seven full-time members that are independent of any other organization and charged with ensuring that GAAP works in the best interest of the investing public. Assets are recorded at cost, which equals the value exchanged at the time of their acquisition. In the United States, even if assets such as land or buildings appreciate in value over time, they are not revalued for financial reporting purposes.

Any external party looking at a company’s financial records will be able to see that the company is GAAP compliant, making it both easier to attract investors and to successfully pass external audits. Hiring a professional accounting team trained in GAAP and having internal auditors track and check finances are two ways to ensure your company is meeting GAAP standards. Generally accepted accounting principles (GAAP) are commonly followed standards, concepts, principles, and industry-specific rules for financial reporting. GAAP, the acronym for generally accepted account principles, is a set of commonly accepted accounting principles, procedures, and standards. Regardless of the size of your business, understanding basic accounting and GAAP principles can help give you a better overall picture of your company’s financial information.

Take the Next Step Toward Your Future in Accounting

Anyone exploring a degree in accounting or finance is bound to encounter Generally Accepted Accounting Principles (GAAP) somewhere along their educational path. These important principles play a vital role in ensuring that accountants abide by the ethics, regulations, and best practices set forth by the Financial Accounting Standards Board (FASB). Since all public companies are required to abide by these standards when compiling their financial statements, GAAP is something that every accountant needs to be familiar with. Accountants use generally accepted accounting principles (GAAP) to guide them in recording and reporting financial information.

The federal government began working with professional accounting groups to establish standards and practices for consistent and accurate financial reporting. This accounting principle is essential for your small business as it helps ensure that you accurately value the expenses of your business assets. The accountants should enter all transactions and prepare all financial reports consistently throughout the financial reporting process. By applying similar standards in the reporting process, accountants can avoid errors or discrepancies. GAAP is a set of accounting standards used in the United States to help publicly-traded companies create their financial statements.

The ultimate goal of any set of accounting principles is to ensure that a company’s financial statements are complete, consistent, and comparable. Accountants are responsible for using the same standards and practices for all accounting periods. If a method or practice is changed, or if you hire a new accountant with a different system, the change must be fully documented and justified in the footnotes of the financial statements.

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