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What Does Generally Accepted Accounting Principles Mean?

Generally accepted accounting principles (GAAP) refer to a common set of accepted accounting principles, standards, and procedures that companies and their accountants must follow when they compile their financial statements. GAAP is a combination of authoritative standards (set by policy boards) and the commonly accepted ways of recording and reporting accounting information. GAAP improves the clarity of the communication of financial information.

GAAP may be contrasted with pro forma accounting and with the IFRS standards, which are both considered to be non-GAAP.


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.