Generally Accepted Accounting Principles

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Date: 2014
Encyclopedia of Business and Finance
From: Encyclopedia of Business and Finance(Vol. 1. 3rd ed.)
Publisher: Gale, a Cengage Company
Document Type: Topic overview
Pages: 3
Content Level: (Level 4)

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Page 353

Generally Accepted Accounting Principles

Most individuals who understand the basics of financial reporting are familiar with the phrase generally accepted accounting principles (GAAP) and will readily identify the Financial Accounting Standards Board (FASB) as the standard-setting body in the United States responsible for establishing accounting principles for nongovernmental entities. Some, however, may not be aware that there is no single reference source for GAAP because these principles are derived from a variety of sources. For example, although the FASB is responsible for issuing FASB Statements of Financial Accounting Standards, Interpretations, and Technical Bulletins, the FASB Emerging Issues Task Force (EITF) issues EITF Abstracts. The American Institute of Certified Public Accountants (AICPA) ceased issuing its Statements of Position in 2009.

It may seem that accounting principles could be generally accepted because of popular vote or consensus of opinion. GAAP, however, is a technical accounting phrase defined in Accounting Principles Board (APB) Statement No. 4, Basic Concepts and Accounting Principles Underlying Financial Statement of Business Enterprises, as “the conventions, rules, and procedures that define accepted accounting practice at a particular time.” GAAP includes not only broad guidelines of general application but also detailed practices and procedures that provide a standard by which to measure financial presentations. For the most part, in financial reporting, generally accepted implies substantial authoritative support.


Although there is no single reference source for GAAP, in 2008 the hierarchy established by the AICPA in Statement on Auditing Standards No. 69 (SAS 69), “The Meaning of ‘Present Fairly in Conformity with Generally Accepted Accounting Principles’” was replaced by the FASB's Statement 162, “The Hierarchy of Generally Accepted Accounting Principles.” Whereas SAS 69 was directed to the auditor rather than the entity, “Statement 162 addresses these issues by establishing that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP” (Financial Accounting Standards Board, 2008).

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The GAAP hierarchy includes four successive categories (A to D), each of which establishes a different level of authority. Generally speaking, if there is a conflict between accounting principles relevant to the circumstances from one or more sources in Categories A, B, C, or D, the treatment specified by the source in the higher category is then followed. In other words, Categories A through D of the hierarchy descend in authority. Therefore, Category A takes precedence over all others, Category B takes precedence over Categories C and D, and Category C takes precedence over Category D. If a situation is not covered by guidelines in Categories A through D, other accounting literature should be considered. That literature, however, should be consulted only when guidelines in higher categories are not applicable.

Category A. Category A consists of the following officially established accounting principles: (1) FASB Statements of Financial Accounting Standards and Interpretations, (2) FASB Statement 133 Implementation Issues, (3) FASB Staff Positions, (4) AICPA Accounting Research Bulletins (ARBs) and APB Opinions that are not superseded by actions of the FASB.

Category B. Category B consists of (1) FASB Technical Bulletins and, if cleared by the FASB, (2) AICPA Industry Audit and Accounting Guides. FASB Technical Bulletins provide timely guidance for applying Category A accounting principles and resolving accounting issues not directly addressed in those principles. The following kinds of guidance may be provided in a Technical Bulletin:

  • Guidance that clarifies, explains, or elaborates on an underlying standard
  • Guidance for a particular situation (usually a specific industry) that differs from the general application required by the standard in an ARB, APB Opinion, or FASB Statement or Interpretation. For example, the guidance in a Technical Bulletin may specify that the standard does not apply to enterprises in a particular industry or may provide for deferral of the effective date of a standard for that industry
  • Guidance that addresses areas not directly covered by existing standards

Category C. Category C consists of (1) AICPA Accounting Standards Executive Committee (AcSEC) Practice Bulletins that have been cleared by the FASB, (2) consensus positions of the FASB EITF, and (3) the topics discussed in Appendix D of EITF Abstracts.

The EITF was established by the FASB in 1984 to assist in the early identification of emerging issues affecting financial reporting and of problems in implementing authoritative pronouncements. Each EITF Abstract summarizes the accounting issue involved and the results of the EITF discussion, including any consensus reached on the issue. Each EITF Abstract also reports, in its “status” section, subsequent developments on that issue, such as issuance of a relevant U.S. Securities and Exchange Commission Staff Accounting Bulletin or an FASB Technical Bulletin. If the EITF can reach consensus on an issue, usually that is taken as an indication that no action is needed by the FASB or AcSEC. Alternatively, if no consensus is possible, it may be an indication that action by one of those bodies is necessary.

AcSEC Practice Bulletins are used to disseminate AcSEC's views for the purpose of providing practitioners and preparers with guidance on narrow financial accounting and reporting issues. The issues covered by AcSEC Practice Bulletins are limited to those that have not been and are not being considered by the FASB. Therefore, AcSEC Practice Bulletins, which are reviewed by the FASB, are issued only after the FASB has informed AcSEC that it has no current plans to consider the issue.

Category D. Category D includes (1) FASB staff implementation guides, (2) AICPA Accounting Interpretations, (3) AICPA Industry Audit and Accounting Guides and Statements of Position not cleared by the FASB, and (4) practices that are widely recognized and prevalent either generally or in the industry.

AICPA Accounting Interpretations (not to be confused with FASB Interpretations, which are included in Category A) were issued from March 1971 through November 1973. The purpose of the interpretations was to provide timely guidance for applying APB Opinions without the formal procedures required for an APB Opinion. In addition, they were used to clarify points on which past practice may have varied and been considered generally accepted. The interpretations, prepared by AICPA staff and reviewed by members of the accounting profession, are not considered to be official pronouncements of the APB.

Implementation guides, which appear in a question-and-answer format, are issued as aids to understanding and implementing various FASB Statements. Typically, those guides are issued when an unusually high number of inquiries are received and the accounting required by a given FASB Statement is particularly complex. The positions and opinions expressed in those guides are those of the FASB staff and do not represent official positions of the FASB.


Occasionally, new transactions or events for which there are no established accounting principles must be reported. In those instances, it is sometimes possible to identify an analogous transaction or event for which there is an established principle and report the new transaction or event Page 355  |  Top of Articlesimilarly. In the absence of a pronouncement in one of the four categories above or an analogous transaction or event, other accounting literature should be considered. Examples of other literature include FASB Concepts Statements; AICPA (AcSEC) Issues Papers; International Financial Reporting Standards of the International Accounting Standards Board; Technical Information Service Inquiries and Replies included in AICPA Technical Practice Aids; pronouncements of other accounting standard-setting bodies, professional associations, or regulatory agencies; and accounting textbooks, handbooks, and articles.

GAAP are not a set of specific circumscribed standards that can be easily found in one convenient set of rules. Rather, they are an amalgam arising from various sources and with an established hierarchy. GAAP range from official standards established by the FASB, through literature from the AICPA, to, in some situations, articles. Nevertheless, the system seems to work reasonably well. Financial statements prepared pursuant to GAAP are highly regarded in the United States for the quality and comparability of the information they provide. Thus, investors and other users have been well served by the U.S. system of financial reporting, which results in the fair presentation of financial information prepared in conformity with GAAP.


Bragg, S. M. (2011). The vest pocket guide to GAAP. Hoboken, NJ: Wiley.

Financial Accounting Standards Board. (2008, May 9). News release. Retrieved January 1, 2014, from

Financial Accounting Standards Board. (2009). FASB accounting standards update. Norwalk, CT: Author.

Financial Accounting Standards Board of the Financial Accounting Foundation. (2008, May). Statement of financial accounting standards No. 162. The hierarchy of generally accepted accounting principles. Retrieved January 1, 2014, from

Label, W. A. (2010). Accounting for non-accountants: The fast and easy way to learn the basics (2nd ed.). Naperville, IL: Sourcebooks.

Edmund L. Jenkins
Cheri Reither Mazza

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Gale Document Number: GALE|CX3727500152