Loading the player...

What are 'Accounting Principles'

Accounting principles are the rules and guidelines that companies must follow when reporting financial data. The common set of U.S. accounting principles is the generally accepted accounting principles (GAAP). To remain listed on many major stock exchanges in the United States, companies must regularly file financial statements reported according to GAAP.

BREAKING DOWN 'Accounting Principles'

Accounting principles differ from country to country. Since accounting principles differ across the world, investors should take practice caution when comparing companies from different countries. The problem of differences in accounting principles is less of an issue in mature markets. Still, investors should be careful, since there is still leeway for the distortion of numbers under many sets of accounting principles.

The professional world of accounting is governed by general rules and concepts referred to as basic accounting principles and guidelines. Together, they form the groundwork for the more complicated, detailed and legalistic rules of accounting.

GAAP is based on three important sets of rules: the basic accounting principles and guidelines, the generally accepted industry practices, and the detailed rules and standards that have been issued by the Financial Accounting Standards Board (FASB) and the Accounting Principles Board (APB).

The FASB and the IASB

The FASB is a private sector group based in the United States. It based its own detailed and comprehensive accounting rules and standards on basic accounting principles and guidelines. The international counterpart of the FASB is the International Accounting Standards Board (IASB). Driven by the increase in global trade and finance, both organizations are working together in establishing a single harmonious set of international financial reporting standards (IFRS).

Generally Accepted Accounting Principles

GAAP attempts to standardize and regulate the definitions, assumptions and methods used in accounting. This helps companies prepare consistent financial statements from year to year.

U.S. companies are required to follow GAAP when releasing financial statements to the public. If a company's stock is publicly traded, federal law requires that its financial statements are audited by independent public accountants. The company's management and the independent accountants must certify that the financial statements and related notes were prepared in accordance with GAAP.

Accounting data are not absolute or concrete, and standards such as GAAP are developed to minimize the negative effects of inconsistent data. Without GAAP, comparing financial statements of companies would be extremely difficult even within the same industry, making an apples-to-apples comparison hard. Inconsistencies and errors would also be hard to spot.

RELATED TERMS
  1. Generally Accepted Accounting Principles ...

    The common set of accounting principles, standards and procedures ...
  2. Accounting Principles Board - APB

    The prior authoritative body of the American Institute of Certified ...
  3. Accounting Standard

    A principle that guides and standardizes accounting practices. ...
  4. Accounting Changes And Error Correction

    Requirements for the accounting for and reporting of a change ...
  5. Financial Accounting

    The process of recording, summarizing and reporting the myriad ...
  6. International Accounting Standards ...

    An older set of standards stating how particular types of transactions ...
Related Articles
  1. Investing

    What are Accounting Principles?

    The term accounting principles refers to rules and guidelines companies use to help them record their business and financial transactions.
  2. Financial Advisor

    Financial Accounting

    Financial accounting is the process of gathering, recording, summarizing and reporting financial data relating to a business. The ultimate goal is to accurately report the financial picture and ...
  3. Investing

    International Financial Reporting Standards (IFRS)

    International Financial Reporting Standards are accounting rules and guidelines governing the reporting of different types of accounting transactions.
  4. Investing

    What are Financial Statements?

    Financial statements are a picture of a company’s financial health for a given period of time at a given point in time. The statements provide a collection of data about a company’s financial ...
  5. Investing

    The Impact Of Combining The U.S. GAAP And IFRS

    The convergence of accounting standards is changing the attitudes of CPAs and CFOs toward harmonization of international accounting.
  6. Investing

    Why Financial Statements Are Harder to Read Than Ever Before

    Understand four major reasons that financial statements published in 2016 are more complicated and difficult to read than they were in the past.
  7. Personal Finance

    Accountant: Job Description & Average Salary

    Discover what the job description of an accountant entails, along with education and training, salary and skills necessary for success.
  8. Investing

    What is Accounting?

    Accounting is the recording of financial transactions of a business or organization. It also includes the process of summarizing, analyzing and reporting these transactions in financial statements.
RELATED FAQS
  1. Who sets the guidelines for accounting principles?

    Understand the generally accepted accounting principles and why they were put in place. Learn what entity sets the guidelines ... Read Answer >>
  2. When and why were GAAP first established?

    Take a deeper look into the development and purpose of the generally accepted accounting principles, also known as GAAP, ... Read Answer >>
  3. What are some of the basic Generally Accepted Accounting Principles?

    Learn more about generally accepted accounting principles determined by the Financial Accounting Standards Board, including ... Read Answer >>
  4. Who enforces GAAP?

    Take a deeper look at the private enforcement mechanisms behind the generally accepted accounting principles for American ... Read Answer >>
  5. Why does financial accounting have to comply with GAAP?

    Read about the roles of the FASB and the SEC as it relates to generally accepted accounting principles for publicly traded ... Read Answer >>
  6. How should a change in accounting principle be recorded and reported?

    Learn about changes in accounting principle and why businesses make them, as well as the reporting and recording requirements ... Read Answer >>
Hot Definitions
  1. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  2. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  3. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  4. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  5. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  6. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
Trading Center