The Principle of Prudence dictates that accountants must present all financial information "as-is" and avoid presenting any data that is based on speculation. This principle mandates that all aspects of a company's financial performance must be disclosed with no expectation of debt compensation. The Principle of Non-Compensation dictates that all financial information must be disclosed regardless of whether it is positive or negative for the company in question. This principle is similar to the Principle of Consistency but strives to create consistent methods within the financial reporting process itself as opposed to consistent standards that the financial accounting process must meet. The Principle of Permanence of Methods dictates that accountants must employ a consistent set of procedures throughout the financial reporting process. This principle mandates that accountants must be sincere in their charge to create financial reports that will provide potential investors with an accurate and honest account of a company's current financial standing. The Principle of Sincerity dictates that accountants must strive to provide a complete and accurate depiction of a company's financial situation. If reporting standards are changed or updated, accountants are expected to fully disclose those changes and explain the reason behind them. This principle ensures that accountants are unable to adjust reporting standards in order to create misleading reports in addition to helping accountants avoid the errors and discrepancies that arise when consistent reporting standards are not used. The Principle of Consistency dictates that accountants must apply consistent standards throughout the financial reporting process. It is this principle that establishes the mandate that all other principles and regulations set forth by GAAP must be always followed. The Principle of Regularity dictates that accountants must abide by all established rules and regulations. The ten principles that make up GAAP are: 1. There are ten core principles that make up GAAP, and each one of these principles takes a different approach toward the ultimate goal of ensuring that a company's financial statements are as accurate and nondeceptive as possible. The Ten Generally Accepted Accounting Principles It is today comprised of seven full-time members that are independent of any other organization and charged with ensuring that GAAP works in the best interest of the investing public. The FASB is an independent board that was formed in 1973 for the specific purpose of taking over GAAP determinations and updates. Today, GAAP is monitored and updated by the Financial Accounting Standards Board (FASB) and continues to play a crucial role in ensuring that all financial statements are compiled in an accurate, ethical, and honest manner. These principles were eventually written into law and enforced by the Securities Act of 1933 and the Securities Exchange Act of 1934 along with a number of other laws issued by the Securities and Exchange Commission (SEC). What they came up with is known today as GAAP. government teamed up with a number of professional accounting groups to create a set of accounting standards that would prevent public companies from releasing misleading financial reports. In response to this catastrophe, the U.S. In fact, such faulty and deceiving reporting practices are considered to be one of the primary factors that ultimately led to the Great Depression in 1929. Without the right accounting standards, publicly traded companies would be free to present their financial information in whatever format that casts the company's position in the best possible light. Explore Online Degrees The Importance of Accounting StandardsĪccounting standards are critical for ensuring that investors aren’t led astray by misleading financial statements. Since all public companies are required to abide by these standards when compiling their financial statements, GAAP is something that every accountant needs to be familiar with. These important principles play a vital role in ensuring that accountants abide by the ethics, regulations, and best practices set forth by the Financial Accounting Standards Board (FASB). Anyone exploring a degree in accounting or finance is bound to encounter Generally Accepted Accounting Principles (GAAP) somewhere along their educational path.
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