GAAP stands for Generally Accepted Accounting Principles, the standard set of rules American companies follow when they prepare financial statements. When an annual report says its numbers were prepared "in accordance with GAAP," it means revenue, expenses, assets and debts were measured and reported the way those rules require.
The point is comparison. If every company booked sales or valued inventory its own way, investors, lenders and regulators could not line up one set of books against another. GAAP gives everyone a shared method, so a profit figure means roughly the same thing from one company to the next.
Quick facts
Stands for
Generally Accepted Accounting PrinciplesType
Acronym, said as one wordHow to say it
"GAP," like the word gapUsed in
Annual reports, audits, loan files, accounting classesSet by
The Financial Accounting Standards Board (FASB) for US companiesRequired for
Public companies that report to the SECNot to be confused with
IFRS, the international standards
What GAAP stands for, word by word
| Letter | Word | What it adds |
|---|---|---|
| G | Generally | Applies broadly, across most companies and industries |
| A | Accepted | Agreed on by the accounting profession and regulators |
| A | Accounting | Covers how money events are recorded and reported |
| P | Principles | Rules and concepts, from broad ideas to detailed standards |
Despite the word "principles," US GAAP is not a short list of ideas. It is a large, organized body of standards, collected in what is called the Accounting Standards Codification. Accountants look up specific topics in it, such as leases, revenue or income taxes.
What does GAAP stand for in accounting practice?
In day to day work, GAAP shapes a handful of big decisions:
- When to record revenue. Sales are generally recognized when the company delivers what it promised, not just when cash arrives.
- Accrual basis. Expenses are matched to the period they relate to, so a bill paid in January for December work belongs to December.
- Consistency. A company should use the same methods from year to year and explain any change.
- Disclosure. Notes to the financial statements explain the numbers, risks and methods behind them.
- Conservatism in estimates. Uncertain gains are not counted early, while likely losses are recognized.
On an auditor's report: "In our opinion, the financial statements present fairly, in all material respects, the financial position of the company in accordance with accounting principles generally accepted in the United States." That long phrase is GAAP written out in full.
Who writes and enforces the rules
For private and public companies in the United States, the standards come from the Financial Accounting Standards Board, a private nonprofit group. The Securities and Exchange Commission (SEC) requires companies that sell shares to the public to file GAAP statements, and outside auditors, usually led by a CPA, check that they do.
State and local governments follow a separate set of standards from the Governmental Accounting Standards Board, sometimes called government GAAP. Small private businesses are not always required to use GAAP, but banks and investors often ask for it before lending or buying in.
GAAP vs IFRS and non-GAAP numbers
Most other countries use IFRS, the International Financial Reporting Standards. The two systems share goals and many ideas, but details differ, for example in how inventory may be valued and how some development costs are handled. A company reporting in several countries may need to translate between them.
You will also see non-GAAP figures in earnings releases. These are measures a company calculates its own way, such as EBITDA or "adjusted earnings," often leaving out one time items. They can be useful, but they are not governed by the same rules, so public companies must show how they connect back to the official GAAP numbers.
Saying and using GAAP in a sentence
Accountants say GAAP as one word that sounds exactly like "gap." Capital letters, no dots, is the normal spelling, and writers often add "US" in front to separate it from other national standards.
- "The startup switched to GAAP before its first audit."
- "Is that figure GAAP or adjusted?"
- "Under GAAP, the lease goes on the balance sheet."
- "Our lender wants GAAP statements every quarter."
Since the spoken word starts with a hard G, it takes "a": "a GAAP requirement." Browse more money terms in the business acronyms section, from audit terms to loan jargon.
Questions people ask
What does GAAP stand for?
It stands for Generally Accepted Accounting Principles, the accounting standards used for financial reporting in the United States.
How do you pronounce GAAP?
Say it as one word, "gap." Nobody in the field spells it out letter by letter.
Do small businesses have to follow GAAP?
Not always. Public companies must, but many small private firms keep books on a simpler basis unless a lender, investor or contract requires GAAP statements.
What is the difference between GAAP and IFRS?
GAAP is the main standard in the United States, while IFRS is used in many other countries. They aim for the same thing, fair and comparable financial statements, but differ on a number of specific rules.
What does non-GAAP mean?
It describes a measure a company calculates outside the GAAP rules, often to strip out unusual items. Public companies that share these numbers must also show the official GAAP figures.