What is GAAP in Accounting?

  • Accounting

GAAP Generally Accepted Accounting Principles (GAAP) are mandatory financial reporting standards that all US public companies must follow when preparing financial statements.

Who sets GAAP standards? The Financial Accounting Standards Board (FASB) creates and maintains GAAP rules in the United States.

Which companies must use GAAP? All public companies trading on US stock exchanges must follow GAAP when filing SEC reports. Private companies can choose other frameworks but often use GAAP for credibility.

Main GAAP principles Revenue recognition requires recording income when earned, not when payment is received. The matching principle ensures expenses align with related revenues in the same accounting period. Conservatism prevents overstating assets and income.

Why GAAP matters GAAP ensures financial statements are consistent and comparable across companies, helping investors and lenders make informed decisions. The SEC can impose fines and suspend companies from trading for non-compliance.

R&D Offer Quiz

Step 1 of 3

Answer to find out if you're eligible for R&D tax credits.

Do the activities performed relate to a new or improved business component’s function, performance, reliability, quality, or composition?(Required)
For Example: A mid-sized packaging company develops a slightly modified cardboard box design to improve its stacking strength (reliability) for warehouse storage, involving minor adjustments to the corrugation pattern to reduce collapse under standard weight loads.
Is your company trying to discover information to eliminate uncertainty concerning the capability or method for developing or improving a business component?(Required)
For Example: A furniture manufacturer investigates whether a cheaper wood adhesive can hold joints as effectively as the current one during assembly, testing bond strength to resolve doubts about its capability in standard production lines.
Do the activities performed constitute a process of experimentation?(Required)
For Example: An auto parts supplier runs a series of bench tests on different lubricant formulations to find one that reduces friction in engine bearings more effectively, systematically comparing wear rates over simulated operating cycles.