11 Main Accounting Principles (GAAP)

What are Accounting Principles?

Accounting standards help make sure that investors aren't influenced by inaccurate financial statements. Accounting principles confirm that publicly-traded companies share their finances accurately and consistently.

The Generally Accepted Accounting Principles (GAAP) are a blueprint for accounting across sectors and industries in the U.S.

The Financial Accounting Standards Board (FASB) established the GAAP to uphold quality standards for accounting activities.

By law, accountants representing all publicly traded companies must comply with GAAP.

Principle of regularity

The principle of regularity in accounting requires that a company consistently follows established accounting rules and standards when recording and reporting its financial information.

In other words, the accountant is compliant with GAAP rules and regulations.

This principle regulates how accounting works as a profession. Without it, every company would manage finances in its own way. This would make it tough to keep business dealings fair.

To apply this principle allow all Financial Accounting Standards Board (FASB) regulations.

Principle of consistency

The principle of consistency states that the accountant has reported all information consistently throughout the reporting process. Under the principle of consistency, accountants must clearly state any changes in financial data on financial statements.

It makes sure that you can compare financial reporting across a company.

Say you're comparing two departments, but they record the same transactions in different ways. This would make it difficult for stakeholders to compare them

To apply this principle create clear processes for recording transactions and events as soon as you start your business. Once you have a set process for documenting and reporting your finances, stick to it.

Principle of sincerity

The principle of sincerity requires the accountant to provide an accurate financial picture of the company.

This is a promise from the accountant that they're not trying to mislead anyone. This helps investors trust that the information your business presents is accurate.It's also a commitment to presenting data in the fairest and most accurate way possible.

To apply this principle save your financial records honestly and accurately.

Principle of permanence of methods

The principle of permanence of methods means that all financial reporting methods should be consistent across time periods.

This is another principle of regularity and consistency.

It makes it easier to compare financial records.

To apply this principle clearly organize your daily bookkeeping operations. It's also a good idea to create processes so that your reporting stays consistent over time.

Principle of non-compensation

With the principle of non-compensation all financial information, both negative and positive, is disclosed accurately.

The proper reporting of financial data should be conducted with no expectation of performance compensation.

It says that accountants shouldn't alter reporting. Instead, accountants must commit to reporting both good and bad performance.

This sounds straightforward, but accounting can impact both internal and external opinions. Because of this, many publicly-traded companies report both GAAP and non-GAAP income.

Sometimes this extra data can help the public image of a company or clarify the value of a company's investments.

To apply this principle create financial reports that are clear and accurate.

Principle of prudence

The principle of prudence requires that financial data should be presented based on factual information, not speculation.

It makes sure that financial statements are a realistic overview of revenues and liabilities. It reminds companies not to over or understate their financial risk.

Business moves fast, and many companies rely on in-progress projects and income to meet goals. But even if this applies to your business, continue to maintain accurate and timely records.

In general, don't expect profits, but prepare for any possible losses.

Principle of continuity

The principle of continuity states the assumption that the company will continue operations.

This is another principle that's about trust. It says to base your accounting on how the business runs now, not how you hope it will run in the future. Even if a company plans to make big changes in the future, that shouldn't change its value today.‍Ho

As your business plans for and makes changes, apply this principle by keeping a consistent process for financial reporting and record-keeping.

Principle of periodicity

The principle of periodicity states that all accounting entries should be reported during relevant time periods.

This is another guide for your reporting timeline. It makes it easier for stakeholders to understand and compare performance because it separates it into short periods of time. It also makes it easier for them to see what the most current financial information is

To apply this principle report on your finances annually, quarterly, and monthly. It's also a good idea to set your fiscal year when you start your business.

Principle of materiality

Accountants should aim to provide full disclosure of all financial and accounting data in financial reports.

Your business can decide which transactions are "material" and which are not.

Enterprise companies will approach what is and is not "material" differently than a small business would. If something isn't "material" it's something the business feels is too small to mention.

If you limit your accounting to material transactions you can save time for your business. At the same time, you want to make sure that financial information that's important to stakeholders is easy to access and review.

This concept comes up most often during an audit.‍‍

To apply this principle start your business accounting recording every transaction. But as your business grows or circumstances change, you may want to revisit the way you record and report small transactions.

Principle of utmost good faith

According to the principle of utmost faith, parties should remain honest in all transactions.

This principle establishes trust. It reinforces that you will share important information with stakeholders before you enter into a contract together.

This gives each person a full and clear picture of your business before they make an agreement

Be transparent and share essential details as you make agreements.

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