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What is GAAP?

Generally Accepted Accounting Principles (GAAP) are basic accounting principles and guidelines which provide the framework for more detailed and comprehensive accounting rules, standards, and other industry-specific accounting practices. For example, the Financial Accounting Standards Board (FASB) uses these principles as a base to frame their own accounting standards. Thus GAAP encompasses:

  • Basic accounting principles/guidelines
  • Accounting Standards usually issued by the premier accounting body of the country
  • Industry-specific accounting practices to cover unusual scenarios

In India, financial statements are prepared on the basis of accounting standards issued by the Institute of Chartered Accountants of India (ICAI) and the law laid down in the respectively applicable acts (for example, Schedule III to Companies Act, 2013 should be compulsorily followed by all companies).

The ICAI also releases guidance notes from time to time on various topics to help in the accounting process and provide clarity. While the basic accounting principles may not directly form part of the accounting standards and the related laws, they are assumed and expected to be universally followed.

Generally Accepted Accounting Principles (GAAP)

These 10 general concepts can help you remember the main mission of GAAP:

1.) Principle of Regularity

The accountant has adhered to GAAP rules and regulations as a standard.

2.) Principle of Consistency

Accountants commit to applying the same standards throughout the reporting process, from one period to the next, to ensure financial comparability between periods. Accountants are expected to fully disclose and explain the reasons behind any changed or updated standards in the footnotes to the financial statements.

3.) Principle of Sincerity

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The accountant strives to provide an accurate and impartial depiction of a company’s financial situation.

4.) Principle of Permanence of Methods

The procedures used in financial reporting should be consistent, allowing a comparison of the company’s financial information.

5.) Principle of Non-Compensation

Both negatives and positives should be reported with full transparency and without the expectation of debt compensation.

6.) Principle of Prudence

Emphasizing fact-based financial data representation that is not clouded by speculation.

7.) Principle of Continuity

While valuing assets, it should be assumed the business will continue to operate.

8.) Principle of Periodicity

Entries should be distributed across the appropriate periods of time. For example, revenue should be reported in its relevant accounting period.

9.) Principle of Materiality / Good Faith

Accountants must strive to fully disclose all financial data and accounting information in financial reports.

10.) Principle of Utmost Good Faith

Derived from the Latin phrase “uberrimae fidei” used within the insurance industry. It presupposes that parties remain honest in all transactions.

Generally Accepted Accounting Principles vs. IFRS

Generally Accepted Accounting Principles is focused on the accounting and financial reporting of U.S. companies. The Financial Accounting Standards Board (FASB), an independent nonprofit organization, is responsible for establishing these accounting and financial reporting standards.

The international alternative to GAAP is the International Financial Reporting Standards (IFRS), set by the International Accounting Standards Board (IASB).

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