GAAP: Generally Accepted Accounting Principles

GAAP is a set of principles that form the foundation for careers in accounting. But, what does GAAP stand for? GAAP are the generally accepted accounting principles, and these guidelines standardize financial reporting and govern how accountants approach all aspects of their job.

What Is GAAP?

GAAP stands for generally accepted accounting principles. Using GAAP, accounting professionals in the United States keep financial reporting consistent across companies and adhere to a set of standards of professionalism. 

The U.S. government created these accounting rules in the early 20th century, mostly as a reaction to the Stock Market Crash of 1929 and the subsequent Great Depression. Lawmakers sought to prevent future crashes by standardizing financial reporting and ensuring records stay consistent, clear, and accurate. 

GAAP has three main sections: the ten GAAP principles, standards set by the Financial Accounting Standards Board (FASB), and guidelines for individual industries. Many of these standards have evolved since the early 1900s as new industries emerged and better systems were crafted.

The 10 GAAP Principles

The ten GAAP principles form the framework of an accountant’s duties and expectations and explain the goal of these standards. 

1. Regularity

The financial team and accountants must adhere to all aspects of GAAP and may not change or reject any regulations. 

2. Consistency

Accountants must ensure consistency over time on internal financial reporting, so every accounting period should follow the same standards and processes. Additionally, the accountant should document any changes made to ensure new accountants or financial team members are aware of the changes. 

3. Sincerity

Accountants must record and report financial information with the utmost accuracy and in an unbiased manner, regardless of the company’s current status. 

4. Permanence of Method

Like the second principle, all financial statements need to be created consistently to ensure cross-company comparisons and avoid confusion.

5. Non-Compensation

All values reported on financial statements must be reported accurately, without any editing or off-setting added to to the numbers to make the overall statement or any negative values look better. 

6. Prudence

Financial statements must be based purely on facts and concrete numbers instead of speculation or forecasting. 

7. Continuity

In the creation of financial reports, accountants must operate under the assumption that the company will continue existing, regardless of the current state of the business. 

8. Periodicity

Financial reports and statements must only include information for the applicable period. For example, quarterly reports must only use financial data from that exact quarter. Reports can’t be manipulated or padded with data from other periods to bolster a particularly weak period.  

9. Full Disclosure (or Materiality)

Accountants must report all available financial information to ensure a genuine and accurate picture of the company’s financial status. 

10. Utmost Good Faith

Accountants should act honestly, ethically, and responsibly in every stage of recording and reporting financial details. 

Who Uses GAAP? 

The U.S. Securities and Exchange Commission (SEC) requires all domestic-based public companies to follow GAAP guidelines when releasing financial statements. Under GAAP, accounting professionals, accountants, and auditors at public companies and accounting firms have a set of practices and standards to follow throughout their day-to-day duties. 

However, private companies don’t need to adhere to GAAP. In fact, according to a study by Petro Lisowsky of the University of Illinois and Michael Minnis of the University of Chicago, Booth School of Business, only about a third of private companies actually follow GAAP standards when producing audited financial statements. 

Additionally, companies outside the U.S. don’t use GAAP at all.

Understanding GAAP intimately is necessary for all accountants in the U.S. However, people working closely with corporate finance may benefit from a familiarity with GAAP. For example, a basic understanding of these principles may help investment bankers gain better insights into how businesses record and report transaction data.

Accountants may deviate from GAAP in certain situations, though. For example, accountants can avoid certain procedures if following them would create a misleading or inaccurate financial statement. This is a rare occurrence usually caused by changes in legislation and conflicting industry practices. Accountants should disclose why they chose to deviate, though. 

GAAP vs. IFRS 

Outside of the U.S., companies and governments rely on standards created by the International Accounting Standards Board (IASB). These standards are called the international financial reporting standards (IFRS) — and is the world’s most commonly used accounting guideline. Places like the European Union, Canada, Brazil, Singapore, and more follow IFRS guidelines. Countries that do not follow the IFRS typically have their own regulated set of rules for financial reporting. 

Additionally, companies based outside of the U.S. that trade on public U.S. exchanges are typically permitted to use IFRS standards rather than adhering to GAAP.

These two systems have been making efforts to merge, though progress is slow. Ultimately, for American accountants, knowing GAAP is the priority, but a familiarity with IFRS principles is a valuable skill. 

>>MORE: Explore more accounting skills you need to get ahead.

Showing You Understand GAAP on Resumes

On your resume, you can highlight your GAAP skills in a few different ways: 

• You can list GAAP as a separate skill.
• You can group GAAP in with skills pertaining to procedures or general accounting knowledge.
• You can allude to GAAP by mentioning skills in basic accounting principles or financial reporting standards. 

If you don’t have any work or internship experience using GAAP, relevant accounting, finance, or economics courses you’ve taken can be a great substitute. Your cover letter is a good place to explain background details. For example, mention if you did an intensive online course focused entirely on learning the generally accepted accounting principles.

Related Accounting Skills 

GAAP only forms the foundation for accounting careers. Beyond that, accountants need specific finance and auditing skills, like:  

• Knowing the types of financial statements, like cash flow statements and balance sheets
• Having a high proficiency in Excel and other accounting software 
• Ability to use relevant accounting formulas, such as the accounting equation
• Familiarity with data modeling and visualization to communicate financial details to coworkers and key stakeholders 

Are you studying accounting but unsure where to go after graduation? Check out some of the best jobs for accounting majors in 2024!

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