GAAP
Generally Accepted Accounting Principles — the standard framework of accounting rules and procedures used by US companies for financial reporting.
Example
“All publicly traded US companies must file financial statements prepared according to GAAP.”
Memory Tip
GAAP = the accounting RULEBOOK. Everyone follows the same rules so reports are comparable.
Why It Matters
GAAP matters because it ensures that financial statements from different companies are prepared using the same rules, making it easier for investors to compare performance and make informed decisions. When you are evaluating stocks or considering investments, you can trust that the numbers reported follow consistent standards across all public companies.
Common Misconception
Many people assume that GAAP is the only way to do accounting or that all companies worldwide use it, but actually many countries have their own accounting standards and some companies use alternative frameworks like IFRS. Additionally, some believe GAAP prevents all accounting errors, when in fact it is a framework that can still be applied incorrectly or manipulated within its rules.
In Practice
When Apple reports quarterly earnings, it must follow GAAP to recognize revenue only when a product is delivered to a customer, not when an order is placed. This means if Apple receives 5 million dollars in advance orders in December but does not ship the products until January, that 5 million dollars appears in January revenue under GAAP, not December, ensuring accurate financial reporting across reporting periods.
Etymology
Acronym for Generally Accepted Accounting Principles. Developed by the Financial Accounting Standards Board (FASB).
Common Misspellings
Small business accounting made simple
Related Terms
More in accounting
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See Also
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