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Understanding GAAP

GAAP is meant to ensure a minimum level of consistency in a company’s financial statements, which makes it easier for investors to analyze and extract useful information. GAAP also facilitates the cross-comparison of financial information across different companies.

These 10 general principles can help you remember the main mission and direction of the GAAP system.

1.) Principle of Regularity

The accountant has adhered to GAAP rules and regulations as a standard.

2.) Principle of Consistency

Professionals commit to applying the same standards throughout the reporting process to prevent errors or discrepancies. Accountants are expected to fully disclose and explain the reasons behind any changed or updated standards.

3.) Principle of Sincerity

The accountant strives to provide an accurate depiction of a company’s financial situation.

4.) Principle of Permanence of Methods

The procedures used in financial reporting should be consistent.