GAAP

1. The Principle of Regularity

This principle requires accountants to adhere strictly to GAAP guidelines and standards in preparing financial reports. It ensures that accounting practices remain consistent and compliant.

• Example: A company’s financial reports should follow the same accounting standards year after year unless changes are explicitly disclosed.

2. The Principle of Consistency

Once an accounting method is chosen, it should be used consistently across periods to ensure comparability of financial data.

• Example: If a company uses the straight-line method for depreciation, it should continue to use this method unless a justified change is made.

3. The Principle of Sincerity

Accountants must provide an accurate and honest portrayal of a company’s financial situation.

• Example: An accountant should not manipulate earnings figures to make the company appear more profitable than it actually is.

4. The Principle of Conservatism ( Disclosure) 

Financial statements should present the least optimistic outcome when faced with uncertainty, recognizing expenses and liabilities as soon as they are reasonably possible, while only recognizing revenues when they are assured.

• Example: A pending lawsuit should be disclosed as a potential liability if the outcome is uncertain.

5. The Principle of Continuity (Going Concern)

This principle assumes that a business will continue operating in the foreseeable future unless there is clear evidence to the contrary.

• Example: If a company faces potential bankruptcy, the financial statements must reflect this uncertainty.

6. The Principle of Periodicity (Time Period Assumption)

Financial reporting should be done for specific and consistent time periods, such as monthly, quarterly, or annually.

• Example: Revenue earned in January should not be combined with revenue from February unless explicitly reporting for a combined period.

7. The Principle of Full Disclosure

All financial information relevant to understanding a company’s financial position must be disclosed.

• Example: Notes to financial statements should provide details about accounting methods, pending litigation, or potential risks.

8. The Principle of Materiality

Only information that would influence the decision of a reasonable user of financial statements should be disclosed.

• Example: A company does not need to report the purchase of a stapler as an expense in its financial statements if it is immaterial.

9. The Principle of Matching

Expenses should be recognized in the same period as the revenues they help generate.

• Example: The cost of goods sold for products sold in March should be recorded in the same month’s financial statements.

10. The Principle of Revenue Recognition

Revenue is recognized when it is earned and realizable, regardless of when cash is received.

• Example: If a service is completed in December but the payment is received in January, revenue should be recognized in December.

11. The Principle of Historical Cost

Assets should be recorded at their original purchase price rather than their current market value.

• Example: If a company purchased a building for $500,000 five years ago, it should still be recorded at $500,000 even if its market value has increased to $700,000.

• IFRS → FMV

• ASPE → FMV or Cost