When used informally, this term refers to the accounting principles, standards and procedures that companies use to draft their financial statements as broadly accepted by the accounting industry. When used formally, this term refers to the formalized GAAP standards devised by the Financial Accounting Standards Board. This comprehensive set of principles forms the foundation of those standards generally considered acceptable by U.S. accounting firms and individual accountants employed by corporations.
In practice, these principles help to provide guidance for public companies required to submit specific financial forms and statements to the U.S. Securities and Exchange Commission. They serve to facilitate transparency, consistency and continuity in reporting, which allows all interested individuals the ability to more easily evaluate reports. In turn, these reports help to influence business decisions, investment options and public confidence levels. While companies often benefit from unique approaches to marketing and product development, when it comes to accounting… compliance with standardized methods, terminology and assumptions is the way to go.
In all, there are ten foundational principles that make up the core of the GAAP standards. These ten foundational principles are:
- Regularity – Strict adherence to established guidelines, rules and regulations
- Sincerity – Accuracy and impartiality
- Permanence of Methods – Consistent application of procedures to all financial documentation used in reporting
- Consistency – Application of relevant standards throughout the reporting process
- Materiality – Full disclosure of an organization’s financial reality
- Continuity – Asset valuations calculated in ways that assume the company will remain operational
- Prudence – Speculation plays no influential role in the reporting process
- Periodicity – Adherence to standard accounting time when accurately reporting revenue
- Non-Compensation – Full reporting of an organization’s positive and/or negative performance without prospect of debt compensation
- Utmost Good Faith – Assumption that all involved parties are acting honestly
Accountant One: “I tried a little something different today. I illustrated the company’s Form S-3 prospectus so it reads like a graphic novel… see?”
Accountant Two: “While super cool, I don’t think that approach is appropriate under the FASB’s Generally Accepted Accounting Principles. We should totally turn this Form S-3 graphic novel concept into a board game though!”
Accountant One: “Totally.”