Generally accepted accounting principles, or GAAP, are standards that encompass the details, complexities, and legalities of business and corporate accounting. The Financial Accounting Standards Board (FASB) uses GAAP as the foundation for its comprehensive set of approved accounting methods and practices.
U.S. law requires businesses releasing financial statements to the public and companies publicly traded on stock exchanges and indices to follow GAAP guidelines. GAAP incorporates the following 10 concepts:
Principle of Regularity: GAAP-compliant accountants strictly adhere to established rules and regulations.
Principle of Consistency: Consistent standards are applied throughout the financial reporting process.
Principle of Sincerity: GAAP-compliant accountants are committed to accuracy and impartiality.
Principle of Permanence of Methods: Consistent procedures are used in the preparation of all financial reports.
Principle of Non-Compensation: All aspects of an organization's performance, whether positive or negative, are fully reported with no prospect of debt compensation.
Principle of Prudence: Speculation does not influence the reporting of financial data.
Principle of Continuity: Asset valuations assume the organization's operations will continue.
Principle of Periodicity: Reporting of revenues is divided by standard accounting periods, such as fiscal quarters or fiscal years.
Principle of Materiality: Financial reports fully disclose the organization's monetary situation.
Principle of Utmost Good Faith: All involved parties are assumed to be acting honestly.