GAAP: Generally Accepted Accounting Principles

The Generally Accepted Accounting Principles (GAAP) are a set of accounting rules and standards that are commonly followed. GAAP specifications, which are the standard adopted by the Securities and Exchange Commission (SEC), include definitions of concepts and principles as well as rules specific to each industry.

GAAP ensures that financial reporting is transparent and consistent across organizations.

GAAP is nothing more than a standard. While its principles aim to improve the transparency of financial statements, they do not guarantee that a company's financial statements are free of errors or omissions intended to mislead investors.

U.S. law requires businesses that release financial statements to the public and companies listed on stock exchanges and indices to follow GAAP guidelines.

The following 10 concepts are incorporated into GAAP:

  1. Principle of Regularity: GAAP-compliant accountants strictly adhere to established rules and regulations.
  2. Principle of Consistency: Consistent standards are applied throughout the financial reporting process.
  3. Principle of Sincerity: GAAP-compliant accountants are committed to accuracy and impartiality.
  4. Principle of Permanence of Methods: Consistent procedures are used in the preparation of all financial reports.
  5. Principle of Non-Compensation: All aspects of an organization’s performance, whether positive or negative, are fully reported with no prospect of debt compensation.
  6. Principle of Prudence: Speculation does not influence the reporting of financial data.
  7. Principle of Continuity: Asset valuations assume the organization’s operations will continue.
  8. Principle of Periodicity: Reporting of revenues is divided by standard accounting periods, such as fiscal quarters or fiscal years.
  9. Principle of Materiality: Financial reports fully disclose the organization’s monetary situation.
  10. Principle of Utmost Good Faith: All involved parties are assumed to be acting honestly.