In a world of uncertainty, people can find stability in accounting and accounting principles. Perhaps the stability comes from the job security an accounting degree affords; the employment of accountants and auditors is projected to grow 10 percent 2026, and that’s growth is likely to be a continuing trend. International expansion in business, a flourishing economy and a complex tax and regulatory system will likely add to the demand for such professionals.
Some may find stability in the consistency of accounting. Numbers have rules, and they follow logical patterns. For some, having a job where the outcome is controllable can be comforting. In accounting, studying accounting principles and following guidelines will likely result in a successful career. Successful accountants generally use two sets of guidelines, the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS).
The Differences between GAAP and IFRS
Conceptually, most experts describe the IFRS as being principles-based, while GAAP is more rules-based. These are three examples of the differences.
- Intangibles: Under GAAP, reporting for intangible assets is at fair value. When using IFRS, reporting requires that the tangible asset has future economic benefit.
- Inventory costs: IFRS bans the last-in, first-out (LIFO) method for inventory accounting. GAAP reporting includes both LIFO and first-in, first-out (FIFO) accounting.
- Write-downs: IFRS allows the reversal of a write-down of inventory if it meets specific criteria. GAAP prohibits any reversal of a write-down.
The GAAP was eventually developed primarily in response to the Stock Market Crash of 1929, which was a factor in the cause of the Great Depression. Some believe that somewhat deceitful financial reporting practices by some publicly-traded companies contributed the crash, and in response, progress began to establish standards for accurate financial reporting. The first steps were the Securities Act of 1933, also known as the “truth securities” law, and the Securities Exchange Act of 1934.
The GAAP has standardized financial reporting and has made it transparent, which makes it easy for investors to easily understand financial statements and compare them with those of another company. GAAP also attempts to make nonprofit and government agencies more accountable by requiring them to openly report finances.
Regulating GAAP Rules
The Financial Accounting Standards Board (FASB) was formed in 1973. It is responsible for the interpretation of the GAAP guidelines when changes in market or industrial practices occur. FASB is an independent nonprofit organization that functions as an arm of the Securities and Exchange Commission (SEC).
The SEC regulates the U.S. public markets. Therefore, any company that sells securities must file registration forms, including financial statements, with the SEC. This law applies to U.S. and foreign companies. One of the goals of the SEC is to provide investors with consistent financial statements from the companies in which they may want to invest. As a result, while the FASB defines the GAAP principles, the enforcement is the responsibility of the SEC.
Companies that sell securities publicly are the only companies that must comply with GAAP. However, the vast majority of U.S. companies, public and private, comply with GAAP to make it easy to describe their business performance.
The 10 GAAP Accounting Principles
The intent of GAAP is to standardize financial reporting practices to promote accuracy and transparency. As a result, any knowledgeable person can understand a company’s statements due to the consistency in how they were prepared and presented. There are 10 principles included in GAAP.
- Regularity: Ensures accountants strictly follow the rules and regulations of GAAP.
- Consistency: Accountants follow consistent standards in financial reporting using commonly accepted terms, practices and procedures.
- Sincerity: Accountants should report with honesty and clarity.
- Permanent methods: Of the commonly accepted terms, practices and procedures, accountants should not change methodology in financial reporting.
- Non-compensation: No accountant is to expect any compensation for providing accurate financial reporting.
- Prudence: All reporting will be factual, without speculation and should be presented in an easily understood manner.
- Continuity: When valuing assets, the assumption will be that the organization will continue in operation.
- Periodicity: Standard accounting time periods will govern the reporting of revenue. Examples include fiscal quarters or years.
- Materiality: All financial reporting will disclose the organization’s monetary position completely and accurately.
- Good faith: Expectations are that anyone involved in financial reporting is acting in good faith.
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Today’s IFRS is the result of years of evolution. In 1967, the Accountants International Study Group (AISG) was formed because accountants in several countries wanted to establish a consistent form of financial reporting for the European Union and perhaps the world. The AISG evolved over time into today’s International Accounting Standards Board (IASB) in 2001.
The IASB develops standards under the oversight of the IFRS Foundation. The standards they issue are called the International Financial Reporting Standards.
Roughly 120 countries use some portion of the principles, and 90 of those require compliance.
The goal of the IFRS principles is to make comparing financial statements from companies in different countries easy. That goal is difficult to achieve since many countries have their own set of rules. The international accounting community continues to work on finding a way to standardize practices around the world.
Four More Accounting Principles from the IFRS
The IFRS covers a wide range of rules, accounting principles and standards. Here are four of the most commonly adopted principles.
- Statement of financial position: This principle influences the process used to prepare and report on a balance sheet.
- Statement of comprehensive income: This principle requires reporting income either in one statement or in a profit and loss statement along with a statement of other income.
- Statement of changes in equity: This statement, also known as a statement of retained earnings, describes the change in a company’s earnings or profit for a financial period.
- Statement of cash flow: This refers to a report that summarizes a company’s financial transactions in an accounting period. The report must separate cash flow into Operations, Investing, and Financing.
Students who are interested in the precision of the accounting field are fortunate that the field offers financial stability, as well. According to the BLS, accountants earn an average salary of $67,000 per year. Earning a degree is the first step to becoming an accountant. West Virginia State University’s online accounting degree provides you with the tools and skills required for you for a range of careers in the accounting field. Our program, which is accredited by the Accreditation Council for Business Schools & Programs, features coursework that teaches you how to think critically about relevant business topics and communicate effectively in the modern workplace.