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.