GAAP

Generally accepted accounting principles (GAAP) are standardized accounting rules used in the United States to improve accuracy and transparency. These rules are followed by businesses and government entities throughout the country according to guidance from the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).

What is GAAP?

The idea of GAAP was introduced in the 1930s, born out of the Securities Act of 1933 and the Securities Exchange Act of 1934. While the principles outlined in today’s GAAP look different than they did nearly 100 years ago, their intended purpose remains the same—ensuring a company’s financial statements are comprehensive, consistent, and comparable.

These standards regulate the reporting of a wide variety of financial information, including revenue recognition and asset valuations. A standardized framework for financial statements allows investors, business owners, auditors, and the public to effectively compare different companies when buying and selling stocks or investigating a business’ financial practices.

GAAP-compliant financial statements are required annually by the United States Securities and Exchange Commission (SEC) for all publicly traded companies in the United States, but many international companies adhere to a similar set of guidelines known as the International Financial Reporting Standards (IFRS). These international rules regulate accounting practices according to metrics established by the International Accounting Standards Board.

For a more complete understanding of these rules and how they might affect your business, check out LegalZoom’s full guide to GAAP.

Frequently asked questions

Who enforces GAAP?

GAAP standards are created and maintained by the FASB and GASB, and enforcement of these standards is handled by the SEC. Failure to comply with these standards can lead to heavy fines, and can damage a company’s reputation for ethical business practices if major infractions are discovered.

Are the GAAP ever revised?

Yes, the GAAP are constantly evolving and should be checked frequently to ensure continued compliance. While there is no set schedule for updates to this set of rules, the bodies responsible for maintaining these standards are able to modify and update them whenever the need to do so arises.

Who has to follow GAAP?

All publicly traded companies must follow GAAP protocols to remain in good standing with the SEC. In addition to businesses, GAAP is used to regulate the financial statements of all government entities in the United States from local councils all the way up to the federal government.