What are 'Accounting Principles'

Accounting principles are the rules and guidelines that companies must follow
when reporting financial data. The common set of U.S. accounting principles is
the generally accepted accounting principles (GAAP). To remain listed on many
major stock exchanges in the United States, companies must regularly
file financial statements reported according to GAAP.

BREAKING DOWN 'Accounting Principles'

Accounting principles differ from country to country. Since accounting principles
differ across the world, investors should take practice caution when comparing
companies from different countries. The problem of differences in accounting
principles is less of an issue in mature markets. Still, investors should be careful,
since there is still leeway for the distortion of numbers under many sets of
accounting principles.
The professional world of accounting is governed by general rules and concepts
referred to as basic accounting principles and guidelines. Together, they form the
groundwork for the more complicated, detailed and legalistic rules of accounting.
GAAP is based on three important sets of rules: the basic accounting principles
and guidelines, the generally accepted industry practices, and the detailed rules
and standards that have been issued by the Financial Accounting Standards
Board (FASB) and the Accounting Principles Board (APB).

The FASB and the IASB

The FASB is a private sector group based in the United States. It based its own
detailed and comprehensive accounting rules and standards on basic accounting
principles and guidelines. The international counterpart of the FASB is the
International Accounting Standards Board (IASB). Driven by the increase in
global trade and finance, both organizations are working together in establishing
a single harmonious set of international financial reporting standards (IFRS).

Generally Accepted Accounting Principles

GAAP attempts to standardize and regulate the definitions, assumptions and

methods used in accounting. This helps companies prepare consistent financial
statements from year to year.
U.S. companies are required to follow GAAP when releasing financial statements
to the public. If a company's stock is publicly traded, federal law requires that its
financial statements are audited by independent public accountants. The
company's management and the independent accountants must certify that the
financial statements and related notes were prepared in accordance with GAAP.
Accounting data are not absolute or concrete, and standards such as GAAP are
developed to minimize the negative effects of inconsistent data. Without GAAP,
comparing financial statements of companies would be extremely difficult even
within the same industry, making an apples-to-apples comparison hard.
Inconsistencies and errors would also be hard to spot.

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Generally Accepted
Accounting Principles - GAAP
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Generally accepted accounting principles (GAAP) are a common set

of accounting principles, standards and procedures that companies 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.

BREAKING DOWN 'Generally Accepted Accounting

Principles - 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.

Compliance
GAAP must be followed when a company distributes its financial statements
outside of the company. If a corporation's stock is publicly traded, the financial
statements must also adhere to rules established by the U.S. Securities and
Exchange Commission (SEC).

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Accounting Principles Board APB

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The prior authoritative body of the American Institute of Certified Public

Accountants (AICPA). Formed by the American Institute of Certified Public
Accountants in 1959, the Accounting Principles Board was replaced in 1973 by
the Financial Accounting Standards Board (FASB). The purpose of the
Accounting Principles Board was to issue pronouncements on accounting
principles. Nineteen of the opinions released by the Accounting Principles Board
still stand as part of the Generally Accepted Accounting Principles (GAAP).

BREAKING DOWN 'Accounting Principles Board - APB'

Between 1959 and 1973, the Accounting Principles Board was charged with
creating accounting standards and issuing pronouncements related to accounting
theory and practice. Unable to operate independently from the United States
government, the Accounting Principles Board was dissolved to allow the smaller,
fully-independent Financial Accounting Standards Board to operate more
effectively.

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