Money Matters

What is GAAP? Accounting principles defined

GAAP is the framework US businesses use to keep financial statements consistent and trustworthy. Here’s what it actually requires, who enforces it, and how to stay compliant as your business grows.

Published September 30, 202612 min read Share

This article was originally published on April 15, 2024 and has been refreshed and re-published with new content on September 30, 2026.

Ask an investor, a lender, or an auditor to trust your financial statements, and sooner or later, they’ll ask the same question: were these prepared using Generally Accepted Accounting Principles (GAAP)? For US public companies, GAAP is generally required for financial reporting, while private businesses may follow it because lenders, investors, owners, or other stakeholders expect GAAP-based statements.

GAAP forms the main accounting framework for financial reporting by US nongovernmental entities, though some sectors follow their own rules, too, such as nonprofit accounting standards.

If you handle finances for an American business, you’ll need to understand what GAAP is, why this framework matters, its core principles, who sets and enforces it, how GAAP compliance works, differences in GAAP vs. IFRS, and the role technology plays in staying compliant.

Key takeaways

• GAAP is the authoritative framework of accounting rules and guidance used to prepare financial statements in the US.
• It’s maintained by the Financial Accounting Standards Board (FASB), overseen by the Financial Accounting Foundation (FAF), with public companies also subject to Securities and Exchange Commission (SEC) requirements.
• GAAP draws on concepts and requirements covering areas such as historical cost, revenue recognition, expense recognition, disclosure, consistency, and going concern. There is no single authoritative list of 8 or 10 “GAAP principles.”
• GAAP is continually amended, with changes communicated through FASB Accounting Standards Updates (ASUs). Topic 842’s changes to lease accounting are one major example.
• GAAP differs from International Financial Reporting Standards (IFRS), which are required for all or most publicly listed companies in more than 140 jurisdictions, including in areas such as inventory valuation.
• Accounting software can help businesses support GAAP-compliant processes through consistent records, automated calculations, controls, and financial reporting.

Here’s what we’ll cover

What is GAAP, and why does it matter?

GAAP is the authoritative US framework of accounting principles, rules, and guidance used by nongovernmental entities when preparing and reporting financial statements. Public companies generally must use GAAP for SEC financial reporting, while private businesses may use it voluntarily or because stakeholders require it.

It’s maintained by the Financial Accounting Standards Board (FASB), under the oversight of the Financial Accounting Foundation (FAF).

GAAP accounting exists to make financial reporting consistent, comparable, and transparent, so investors, lenders, and regulators can understand and compare financial information prepared on a common basis.

Who sets and enforces GAAP?

GAAP is set and maintained by the FASB, an independent, private-sector body created in 1973.

FASB succeeded the Accounting Principles Board as the private-sector body responsible for establishing accounting guidance for nongovernmental entities.

Organization	Role
Financial Accounting Foundation (FAF)	Independent nonprofit, founded in 1972; oversees both FASB and the Governmental Accounting Standards Board (GASB).
Financial Accounting Standards Board (FASB)	Sets GAAP for public and private companies and nonprofits.
Governmental Accounting Standards Board (GASB)	Sets GAAP for state and local governments.
Securities and Exchange Commission (SEC)	Has statutory authority over financial reporting by US public companies and recognizes FASB’s standards as generally accepted for that purpose. The SEC also issues its own accounting and disclosure requirements for registrants.

The FASB compiles and maintains authoritative nongovernmental US GAAP in the Accounting Standards Codification (ASC), which has been the single authoritative source for nongovernmental GAAP, other than applicable SEC guidance, since 2009.

What are the principles of GAAP?

There isn’t one official FASB list of exactly 8, 10, or any other fixed number of “GAAP principles.” GAAP is the body of authoritative accounting guidance in the FASB Codification, supported by a conceptual framework that helps FASB develop that guidance.

However, several long-established accounting concepts and requirements are commonly used to explain how GAAP works in practice:

1. Historical cost

Many assets are initially recorded based on their acquisition cost, giving businesses an objective and verifiable starting point for accounting. GAAP also requires or permits other measurement bases, including fair value, for certain assets and liabilities, so historical cost isn’t a universal valuation rule.

2. Revenue recognition

Under GAAP, revenue recognition depends on the requirements that apply to the transaction. For revenue from contracts with customers under ASC Topic 606, the core principle is to recognize revenue as goods or services are transferred to the customer in an amount reflecting the consideration the business expects to receive.

3. Matching

Expenses should be recognized in the period in which the related economic benefits are consumed or obligations arise. In some cases, this means recognizing costs alongside the revenue they help generate. For example, if a manufacturer buys materials in bulk ahead of time, those materials aren’t expensed until they’re actually used to produce sellable goods, keeping reported profitability accurate for each period.

4. Full disclosure

Financial statements and their notes should include information required by GAAP that is material to users’ understanding of the business’s financial position and performance. This gives stakeholders the context they need to interpret the figures rather than relying on the primary statements alone.

5. Verifiability and faithful representation

Useful financial information should faithfully represent the economic phenomena it describes and, where possible, be supported by evidence that knowledgeable independent observers can evaluate. Accounting estimates are still permitted—and often necessary—so GAAP does not require every reported amount to be free from estimation.

6. Consistency

Once a business adopts a specific accounting method, it should continue using it from one period to the next unless a change is clearly warranted and disclosed. This allows financial information to be meaningfully compared over time.

7. Neutrality and appropriate judgment

GAAP requires financial information to be presented without deliberate bias. Accountants still need to exercise judgment when dealing with estimates and uncertainty, but that judgment should not be used systematically to understate assets or income or overstate liabilities and expenses.

8. Going concern

Financial statements are ordinarily prepared on the assumption that the business will continue operating rather than being liquidated. GAAP also requires management to evaluate whether conditions or events raise substantial doubt about the entity’s ability to continue as a going concern and to provide appropriate disclosures where required.

How are GAAP standards updated?

The FASB continually updates GAAP through Accounting Standards Updates (ASUs), which communicate amendments to the Accounting Standards Codification. The Codification itself—not the ASU document—is the authoritative source of nongovernmental US GAAP.

Those amendments address new accounting issues, clarify existing guidance, and change how particular transactions are recognized, measured, presented, or disclosed. One clear example is Topic 842, which changed how businesses account for leases.

Before Topic 842

Under previous GAAP, many operating leases were not recognized as lease assets and liabilities on a lessee’s balance sheet. Instead, operating lease expense was generally recognized over the lease term.

After Topic 842

Under Topic 842, lessees generally recognize a right-of-use asset and corresponding lease liability for operating leases on the balance sheet, subject to specific requirements and exceptions such as the accounting policy election available for certain short-term leases.

This shift gives stakeholders a clearer picture of a company’s lease obligations and rights to use leased assets.

It’s a useful illustration of how GAAP evolves over time. Businesses should check the FASB’s Accounting Standards Codification directly for current requirements, since standards are updated on an ongoing basis.

How to become GAAP compliant

Becoming GAAP compliant starts with understanding which standards apply to your business, then methodically closing any gaps between your current practices and those requirements.

Here’s the process, step by step:

1. Assess current accounting practices

   Identify which GAAP standards are relevant to your business, based the transactions you enter into, your industry, and the nature of your financial reporting. Review your existing financial statements and reporting processes to pinpoint where they fall short of GAAP requirements.

2. Compare current practices to GAAP

   Analyze your accounting methods, documentation, and reporting formats against GAAP standards to identify specific discrepancies, then build a tailored action plan with clear tasks, owners, and timelines.

3. Implement GAAP-compliant practices

   Adjust how transactions are recorded, such as revenue recognition, leasing, or inventory valuation, using a well-organized chart of accounts, and update your financial reporting processes to meet the presentation and disclosure requirements that apply to your organization.

4. Train accounting staff

   Run regular training so your team understands GAAP principles and stays current on standard updates, supplemented by external courses or professional development where useful.

5. Leverage technology

   Implement or upgrade accounting software that helps your team apply consistent accounting policies, automate recurring calculations and reporting, and maintain the records and documentation needed to support financial reporting.

6. Review continuously

   Engage accounting professionals for ongoing insight into complex issues, and establish a routine for regularly reviewing your practices as GAAP standards evolve.

7. Update policies

   Revise internal accounting policies to reflect your GAAP-compliant practices, keep detailed records supporting significant accounting judgments, and make sure documentation stays accessible to relevant staff.

GAAP versus IFRS

GAAP is the primary financial reporting framework for US companies that report under US GAAP, while International Financial Reporting Standards (IFRS) are required for all or most publicly listed companies in more than 140 jurisdictions. Businesses operating internationally need to understand where the two frameworks diverge.

Comparison point	GAAP	IFRS
Used in	Primarily the United States.	Required for all or most publicly listed companies in 140+ jurisdictions.
Approach	Often contains more detailed, topic-specific guidance.	Often relies more heavily on principles and professional judgment.
Inventory valuation	Permits LIFO (Last In, First Out).	LIFO prohibited; FIFO (First In, First Out) or weighted average may be used where applicable.

The LIFO/FIFO difference matters in practice: during periods of rising inventory costs, LIFO can result in a higher cost of goods sold and lower reported income than FIFO because newer, higher costs are recognized first. IFRS does not permit LIFO, so a company reporting under both frameworks may need different inventory accounting and can report different profit and asset values as a result.

What are the limitations of GAAP?

GAAP improves consistency and comparability, but it isn’t without drawbacks. Understanding its limitations helps businesses use GAAP-compliant statements appropriately, rather than treating them as a complete picture.

• Complexity: GAAP’s detailed, rules-based approach can struggle to keep pace with new or unusual transactions that don’t fit existing standards cleanly.
• Compliance cost: maintaining the accounting processes, documentation, controls, and specialist knowledge needed for GAAP reporting can create a disproportionate burden for some smaller organizations.
• Historical focus: financial statements primarily report financial position and past performance. Although GAAP uses several measurement bases—including fair value in some areas—they are not designed to provide a complete view of a company’s future prospects or current market value.
• Changing requirements: GAAP continues to evolve as FASB amends the Codification, which means finance teams need processes for identifying relevant changes and implementing them by the applicable effective dates.
• Limited international comparability: since GAAP is US-specific, comparing GAAP-based statements directly against IFRS-based ones from other countries requires adjustment and care.

None of this makes GAAP any less essential; it just means GAAP-compliant statements are one input into a bigger financial picture, not the whole story.

What is non-GAAP reporting?

Non-GAAP reporting refers to financial measures companies present alongside their required GAAP statements, adjusted to exclude items like one-time charges, stock-based compensation, or restructuring costs. Common examples include adjusted earnings per share and free cash flow.

Companies use non-GAAP measures to highlight what they consider a clearer view of ongoing, core business performance, stripped of items they see as unusual or non-recurring. However, since non-GAAP measures aren’t standardized the way GAAP is, they can vary significantly between companies, even within the same industry.

The SEC places specific requirements on public companies that report non-GAAP measures:

• Equal or greater prominence: the comparable GAAP measure must be shown with equal or greater prominence than the non-GAAP one.
• Clear reconciliation: companies must reconcile the non-GAAP measure back to its GAAP equivalent.
• No misleading presentation: non-GAAP measures can’t be presented in a way that is materially misleading.

How can technology support GAAP compliance?

Accounting software can support GAAP compliance by helping finance teams apply accounting policies consistently, automate repeatable calculations, maintain supporting records, and produce reliable financial reports. Technology doesn’t determine whether a business is GAAP compliant on its own, but it can make the underlying processes easier to control and review.

• Automated calculations and reporting: accounting systems can automate recurring calculations such as depreciation schedules and support workflows for areas including revenue recognition and lease accounting, reducing reliance on manual processing.
• Consistent, audit-ready records: automation helps teams maintain consistent documentation and reporting processes from period to period, making records easier to review and audit.
• Real-time financial reporting dashboards: tools like Sage Intacct’s financial reporting dashboards give finance teams up-to-date visibility into financial performance and reporting data rather than relying solely on manual month-end compilation.
• Sector-specific accounting support: some organizations face additional complexity, such as nonprofits. Nonprofit accounting software and tools like Sage Intacct’s nonprofit revenue recognition capabilities can support the accounting workflows involved in managing areas such as grants, pledges, donor restrictions, and revenue recognition.

Selecting the right technology is an important part of building efficient, controlled financial reporting processes as a business grows.

Stay GAAP compliant with confidence

Keeping up with GAAP takes consistent processes, accurate records, and the right tools behind them.

Ready to spend less time worrying about compliance and more time running your business? Explore accounting software that can help you maintain accurate records, consistent processes, and reliable financial reporting as you grow.

Frequently asked questions about GAAP

Is GAAP legally required, or is it voluntary?

US public companies generally need to prepare financial statements filed with the SEC in accordance with US GAAP, although different rules can apply in specific circumstances, including for eligible foreign private issuers. Private companies generally aren’t subject to the same SEC requirement, but GAAP may still be required or expected by lenders, investors, owners, contracts, or other stakeholders.

What are the 4 principles of GAAP?

There is no authoritative FASB list of exactly 4 GAAP principles. You may see different educational sources group GAAP concepts into 4, 8, or 10 principles, but authoritative US GAAP is contained in the FASB Accounting Standards Codification rather than defined by one fixed numbered list.

What happens if a business doesn’t follow GAAP?

For a public company required to file GAAP financial statements, material departures from GAAP can lead to corrected or restated financial statements and may attract SEC scrutiny or enforcement. For private companies, the consequences depend on why GAAP is being used—for example, noncompliant statements could breach lending or contractual requirements or make financial information less useful to investors and other stakeholders.

Why does GAAP matter for small businesses?

Even without a legal requirement, using GAAP can make financial reporting more consistent and easier for lenders, investors, potential buyers, and other stakeholders to assess. It can also make due diligence smoother if a business later seeks funding, takes on new debt, or prepares for a sale.

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