Understanding Generally Accepted Accounting Principles of USA (GAAP)
Accounting standards in the USA are a set of accounting guidelines known as Generally Accepted Accounting Principles (GAAP). These standards govern how companies in the United States record and present their financial statements to regulatory authorities, investors, and all stakeholders.
The Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB) developed and issued GAAP that were industry-specific guidance and standards, as well as basic accounting principles.
GAAP is the default accounting standard for U.S.-based companies and is required by the U.S. Securities and Exchange Commission (SEC), to ensure financial statements presented by the companies are complete, consistent, and comparable.
Some primary aspects of GAAP include:
Principle of consistency: The principle of consistency in accounting states that a business should use the same accounting methods and principles consistently across accounting periods to make financial reporting easier to compare.
Principle of permanent methods: Consistent procedures are used in the preparation of all financial reports to be consistent which enables comparison across both companies and periods.
Principle of Non-Compensation: All aspects of an organization’s performance will report with full transference, whether positive or negative, is full with no prospect of debt compensation.
Principle of prudence: All reporting of financial data is to be factual, reasonable, and not speculative.
Principle of regularity: The principle of regularity is one of the Generally Accepted Accounting Principles (GAAP) that requires accountants to follow GAAP rules and regulations consistently. This principle means that all accountants are to consistently abide by the GAAP and it ensures that accounting methods and principles are consistent across different time periods.
Principle of sincerity: Principle of sincerity: Accountants should perform and report with basic honesty and accuracy.
Principle of good faith: The principle of good faith is also known as the principle of honesty. The principle of utmost good faith establishes that all businesses and accountants must be entirely honest and forthcoming in their financial recording and reporting. This encompasses many other GAAP principles that prevent deceit or deception in accounting.
Principle of materiality: The materiality principle outlines that accountants must follow generally accepted accounting practices except where it makes no difference if the omission or misstatement of information in a financial report would impact a reasonable user’s decision-making. If information is significant, it is material. If the information is insignificant or irrelevant, it is said to be immaterial.
Principle of continuity: The principle of continuity, also known as the going concern principle, is an accounting principle that assumes a business will continue to operate normally unless there is evidence to the contrary. This principle is used to guide the valuation of assets and liabilities and is a key part of financial statement preparation. The principle of continuity prevents companies from valuing their assets based on speculative plans. Instead, it assumes that the company will meet its obligations and benefit from its assets through regular operations.
Principle of periodicity: The concept of periodicity states that businesses should report their financial position, results of operations, and cash flows at regular intervals, usually monthly, quarterly, or yearly.
The Generally Accepted Accounting Principles (GAAP) also prescribe standardized currency units, cost and revenue recognition, financial statement format and presentation, and required disclosures.