Accounting Principles

The basic or fundamental principles in accounting are the cost principle, full disclosure principle, matching principle, revenue recognition principle, economic entity assumption, monetary unit assumption, time period assumption, going concern assumption, materiality, and conservatism. The last two are sometimes referred to as constraints. Rather than distinguishing between a principle or an assumption, I prefer to simply say that these ten items are the basic principles or the underlying guidelines of accounting. (My reason is that accounting principles also include the statements of financial accounting standards and the interpretations issued by the Financial Accounting Standards Board and its predecessors, as well as industry practices.)

accounting principles

There are also “qualities” of accounting information such as reliability, relevance, consistency, comparability, and cost/benefit. These are discussed in the Statement of Financial Accounting Concepts No. 2, which can be found on the Financial Accounting Standards Board’s website
Accountants follow a common set of rules to create the financial statements. Without these basic rules in place, it would be difficult for lenders, investors, and other financial statement users to compare, analyze, or even trust the information reported on financial statements.

If one company, for example, reports sales or expenses differently from another company, this reporting difference can give the appearance of more profits for one company, when in fact profits are the same for both companies had they both used the same accounting methods. For this reason, rules are set in place to determine what activities to measure, when to measure them, and how to measure them.

GAAP Accounting

GAAP is the acronym for generally accepted accounting principles. In the U.S. that means
the basic accounting principles and guidelines such as the cost principle, matching principle, full disclosure, etc., the detailed standards and other rules issued by the Financial Accounting Standards Board (FASB) and its predecessor the Accounting Principles Board, and generally accepted industry practices.

GAAP must be adhered to when a company distributes its financial statements outside of the company. If a corporation’s stock is publicly traded, the financial statements must also adhere to rules established by the U.S. Securities and Exchange Commission (SEC). This includes having its financial statements audited by an independent CPA firm.
GAAP Accounting

Organizations and entities utilize GAAP standards in order to create financial statements deemed trustworthy by users and potential investors. The information provided in these statements can be used to assess the financial health of an organization, as well as determine how well an organization manages its resources and assets. Because financial statements that follow GAAP practices are generally verifiable by independent third parties, these statements are used to provide the necessary information for users to make determinations such as whether to invest capital, lend or donate money to an organization or company, or assess how well public officials are handling constituents’ tax dollars.