The acronym GAAP [1] stands for “Generally Accepted Accounting Principles.” This term makes reference to the standardized guidelines for financial accounting in a given jurisdiction. The GAAP includes the main rules that accountants must follow when they record transactions and prepare financial statements. The principles are defined as follows:
Principle of Regularity, meaning that a business conforms to rules and laws.
Principle of Consistency, meaning that once a business determines a method for an item’s accounting, it will be consistent and enter other comparable items in the same manner.
Principle of Sincerity, meaning that accounting should be an actual representation of financial status.
Principle of Permanence of Methods, meaning that there must be clarity and comparison of the financial information published by the company.
Principle of Non-Compensation, meaning that the details of the financial information should be disclosed without trying to offset a debt [2] with an asset [3].
Principle of Prudence, meaning that financial circumstances are shown as they really are, and not made to look better (or worse) than in actuality.
Principle of Continuity, meaning that financial details should be reported with the assumption that there will be no interruption of business.
Principle of Periodicity, meaning that accounting entries must be assigned to a specific time period, and divided accurately if it extends over multiple periods.
Principle of Full Disclosure/Materiality, meaning that all of the information about a business’ financial situation must be included.
Principle of Utmost Good Faith, meaning that every detail of information about a company must be disclosed before the completion of a contract [4].