There are general rules and guidelines that companies must follow when reporting financial data.  These general rules refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards. GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing, and in the preparation of financial statements. Accounting principles differ around the world, and countries usually have their own, slightly different, versions of GAAP.

Since accounting principles differ across the world, investors should be aware of these differences and account for them when comparing companies in different countries. The problem of differences in accounting principles does not much affect mature markets. Still, investors should be careful, since there is still leeway for the distortion of numbers under many sets of accounting principles

The phrase "generally accepted accounting principles" (or "GAAP") consists of three important sets of rules: (1) the basic accounting principles and guidelines, (2) the detailed rules and standards and (3) the generally accepted industry practices.

GAAP is exceedingly useful because it attempts to standardize and regulate accounting definitions, assumptions, and methods. Because of generally accepted accounting principles it enables to assume that there is consistency from year to year in the methods used to prepare a company's financial statements. And although variations may exist, it helps to make reasonably confident conclusions when comparing one company to another, or comparing one company's financial statistics to the statistics for its industry. Over the years the generally accepted accounting principles have become more complex because financial transactions have become more complex.

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The Basic Principles:
Principles derive from tradition, such as the concept of matching. In any report of financial statements (audit, compilation, review, etc.), the preparer/auditor must indicate to the reader whether or not the information contained within the statements complies with GAAP.

• Principle of regularity: Regularity can be defined as conformity to enforced rules and laws.

• Principle of consistency: This principle states that when a business has once fixed a method for the accounting treatment of an item, it will enter in exactly the same way all similar items that follow.

• Principle of sincerity: According to this principle, the accounting unit should reflect in good faith the reality of the company's financial status.

• Principle of the permanence of methods: This principle aims at allowing the coherence and comparison of the financial information published by the company.

• Materiality concept: An item is considered material if its omission or misstatement will affect the decision making process of the users. Materiality depends on the nature and size of the item. Only items material in amount or in their nature will affect the true and fair view given by a set of accounts.

An error that is too trivial to affect anyone’s understanding of the accounts is referred to as immaterial. In preparing accounts it is important to assess what is material and what is not, so that time and money are not wasted in the pursuit of excessive detail.

• Principle of non-compensation: One should show the full details of the financial information and not seek to compensate a debt with an asset, revenue with an expense, etc.

• Principle of prudence: This principle aims at showing the reality "as is": one should not try to make things look prettier than they are. Typically, revenue should be recorded only when it is certain and a provision should be entered for an expense which is probable.

• Principle of continuity: When stating financial information, one should assume that the business will not be interrupted. This principle mitigates the principle of prudence: assets do not have to be accounted at their disposable value, but it is accepted that they are at their historical value .

• Principle of periodicity: Each accounting entry should be allocated to a given period, and split accordingly if it covers several periods. If a client pre-pays a subscription (or lease, etc.), the given revenue should be split to the entire time-span and not counted for entirely on the date of the transaction.

• Principle of Full Disclosure/Materiality: All information and values pertaining to the financial position of a business must be disclosed in the records.

• Principle of Utmost Good Faith: All the information regarding to the firm should be disclosed to the insurer before the insurance policy is taken.

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