Generally Accepted Accounting Principles (abbreviated GAAP), are the general rules, regulations and guidelines that are followed in the United States by accountants to ensure their practices are legal and ethical. It sets out the standard for managing accounts, preparing financial statements and accounting methods and techniques. GAAP are issued and governed by the Financial Accounting Standards Board (abbreviated FASB) and the International Accounting Standards Board (IASB) to provide equal and comparable standards the world over.
The main principals that ensure fair and accurate, free from inconsistencies accounting are listed and explained below:
1) Regularity: to ensure books and accounts are updated in a timely manner, but more importantly that tax returns and information is provided within the time given.
2) Consistency: accounting methods and techniques must remain the same throughout the financial year to remain consistent.
3) Sincerity: accountants should remain truthful and accurately express the true financial stability of their client(s) without excessive window dressing and PR.
4) Permanence of Methods: financial information and the methods used must be clear and presented coherently.
5) Non Compensation: all financial information must be present and therefore a negative must not be compensated by a positive; both must be shown in full.
6) Prudence: accounts should know reality and shouldn’t list financial data that is based on probability or assumption.
7) Continuity: it is accepted that over time an assets value changes and it is fair to represent this with depreciation.
8) Periodicity: revenue should be allocated over the entire span of its income/expenditure and not just on the final date of a transaction. For example a subscription has several payments.
9) Full Disclosure & Materiality: absolutely everything financially related to the business must be presented in the records.
All countries have their own variation of these guidelines, but are generally the same.