Do you have an interview for an accounting position coming up? If so, it’s a good idea to refamiliarize yourself with the Generally Accepted Accounting Principles, or GAAP. These principles guide companies and accountants when it comes to recording and reporting accounting information. Even if you’re not asked directly about GAAP in an interview, it’s always a good idea to have a solid understanding of it. These principles form the foundation of everything you do as an accountant.
Let’s brush up on GAAP so you can be properly prepared for your next accounting interview.
What is GAAP?
Generally accepted accounting principles (GAAP) refer to a set of principles, standards, and procedures set forth by the Financial Accounting Standards Board (FASB). Publicly traded companies in the United States are required by the Securities and Exchange Commission (SEC) to follow these standards when compiling their financial statements. Private companies technically do not have to follow GAAP standards, but most do because it’s viewed favorably by lenders and creditors.
What are the core GAAP concepts?
10 concepts make up the core mission of GAAP:
- Principle of Regularity – the accountant has adhered to GAAP rules and regulations.
- Principle of Consistency – the accountant commits to applying the same standards throughout the reporting process to ensure comparability.
- Principle of Sincerity – the accountant, provides an accurate and impartial depiction of a company’s financial situation.
- Principle of Permanence of Methods – the procedures used in financial reporting must remain consistent.
- Principle of Non-Compensation – negatives and positives must be reported with full transparency without any expectation of compensation.
- Principle of Prudence – accountants must not let speculation influence the reporting of financial data
- Principle of Continuity – the accountant assumes the business will continue to operate while they’re valuing assets.
- Principle of Periodicity – entries must be distributed across the appropriate period of time
- Principle of Materiality – the accountant must fully disclose all financial data and accounting information in their reports.
- Principle of Utmost Good Faith – all involved parties are assumed to be acting honestly.
Why is GAAP so important?
GAAP maintains trust in the financial markets as a whole. If GAAP wasn’t present, investors would be reluctant to trust companies’ information presented to them. That could mean fewer transactions and investments, ultimately resulting in a less robust economy.
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