GAAP (Generally Accepted Accounting Principles) 

 
GAAP​ (generally accepted accounting principles) is a collection of commonly-followed 
accounting rules and standards for financial reporting. 
 
GAAP​ specifications include definitions of concepts and principles, as well as industry-specific 
rules. The purpose of ​GAAP​ is to ensure that financial reporting is transparent and consistent 
from one organization to another. 
 
There is no universal ​GAAP​ standard and the specifics vary from one geographic location or 
industry to another. In the United States, the ​Securities and Exchange Commission (SEC) 
mandates that financial reports adhere to ​GAAP​ requirements. The ​Financial Accounting 
Standards Board (FASB)​ stipulates ​GAAP ​overall and the ​Governmental Accounting 
Standards Board (GASB) ​stipulates G ​ AAP​ for state and local government. Publicly traded 
companies must comply with both SEC and ​GAAP​ requirements. 
 
Basic Accounting Principles and Guidelines of GAPP 
 
Since ​GAAP​ is founded on the basic accounting principles and guidelines, we can better 
understand ​GAAP​ if we understand those accounting principles. The following is a list of the 
ten main accounting principles and guidelines together with a highly condensed explanation of 
each. 
 
1. Economic Entity Assumption 
The accountant keeps all of the business transactions of a sole proprietorship separate from 
the business owner's personal transactions. For legal purposes, a sole proprietorship and its 
owner are considered to be one entity, but for accounting purposes they are considered to be 
two separate entities. 
 
2. Monetary Unit Assumption 
 
Economic activity is measured in U.S. dollars, and only transactions that can be expressed in 
U.S. dollars are recorded. 
 
3. Time Period Assumption 
 
This accounting principle assumes that it is possible to report the complex and ongoing 
activities of a business in relatively short, distinct time intervals such as the five months ended 
May 31, 2018, or 5 weeks ended May 1, 2018.  
 
 
4. Cost Principle 
 
From an accountant's point of view, the term "cost" refers to the amount spent (cash or the 
cash equivalent) when an item was originally obtained, whether that purchase happened last 
year or thirty years ago. For this reason, the amounts shown on financial statements are 
referred to as historical cost amounts. 
 
5. Full Disclosure Principle 
 
If certain information is important to an investor or lender using the financial statements, that 
information should be disclosed within the statement or in the notes to the statement. It is 
because of this basic accounting principle that numerous pages of "footnotes" are often 
attached to financial statements. 
 
6. Going Concern Principle 
 
This accounting principle assumes that a company will continue to exist long enough to carry 
out its objectives and commitments and will not liquidate in the foreseeable future.  
 
7. Matching Principle 
 
This accounting principle requires companies to use the accrual basis of accounting. The 
matching principle requires that expenses be matched with revenues.  
 
8. Revenue Recognition Principle 
 
Under the accrual basis of accounting (as opposed to the cash basis of accounting), revenues 
are recognized as soon as a product has been sold or a service has been performed, 
regardless of when the money is actually received. Under this basic accounting principle, a 
company could earn and report $20,000 of revenue in its first month of operation but receive 
$0 in actual cash in that month. 
 
9. Materiality 
Because of this basic accounting principle or guideline, an accountant might be allowed to 
violate another accounting principle if an amount is insignificant. Professional judgement is 
needed to decide whether an amount is insignificant or immaterial. 
 
10. Conservatism 
 
If a situation arises where there are two acceptable alternatives for reporting an item, 
conservatism directs the accountant to choose the alternative that will result in less net income 
and/or less asset amount. Conservatism helps the accountant to "break a tie." It does not 
direct accountants to be conservative. Accountants are expected to be unbiased and 
objective. 
 
GAAP compliance 
 
Being ​GAAP​ compliant essentially means that you have maintained financial records in a way 
that allows investors, lending institutions, prospective buyers, etc. to make a sound decision 
regarding your company. For the average entrepreneur or small business owner with a terrific 
idea or great product, ​GAAP​ will not even be on the radar. As soon as you need some 
financing for expansion or are approached by a potential buyer, however, you will need to be 
compliant. 
 
 
Purpose of GAAP: 
 
The purpose of ​GAAP ​is to create a uniform standard for financial reporting. When financial 
information is made available to the public, it should serve the purpose of helping investors 
make informed decisions as to where to put their money. 
 
GAAP used:  
 
Managers and investors would struggle to interpret financial statements without U.S. Generally 
Accepted Accounting Principles. ​GAAP p ​ rovides a standardized methodology for recording 
transactions and events that impact the financial position of a company. 
 
GAAP necessary: 
 
Having accounting standards like US ​GAAP ​and IFRS enables you to compare the 
performance of companies within and across economic sectors, so the standards are 
necessarily generic in nature. ​GAAP n
​ umbers should be neutral, comparable and verifiable, 
and provide information that markets can trust. 
 
GAAP required for private companies? 
 
The AICPA framework is a reporting system that should be popular with both companies and 
their banks. There are more than twenty million SMEs in the United States that do not have to 
comply with ​GAAP ​because they are not public, although many private companies prefer to 
follow ​GAAP ​rules. 
 
Is GAAP required for private companies 
 
The AICPA framework is a reporting system that should be popular with both companies and 
their banks. There are more than twenty million SMEs in the United States that do not have to 
comply with ​GAAP ​because they are not public, although many private companies prefer to 
follow ​GAAP ​rules 
 
Do all US companies have to use GAAP? 
 
The use of ​GAAP ​is not mandatory for all businesses, but the U.S. Securities and Exchange 
Commission (SEC) requires publicly traded and regulated companies to follow ​GAAP ​for the 
purpose of financial reporting 
 
 
Is GAAP worldwide? 
 
International Financial Reporting Standards (IFRS) is the accounting method that's used in 
many countries across the world. It has some key differences from the​ Generally Accepted 
Accounting Principles (GAAP)​ implemented in the United States.