Generally accepted accounting principles (GAAP) are the set of accounting standards, conventions, and rules that govern financial reporting in the United States. The Financial Accounting Standards Board (FASB) sets and maintains GAAP, updating it through Accounting Standards Updates (ASUs).
GAAP requires accrual accounting, consistent application of accounting methods from period to period, and disclosure of all material information in financial statements. The core purpose is comparability — investors and creditors can compare financial statements across companies because those statements are prepared under the same rules. Without a shared framework, each company could report results however it wanted, and cross-company analysis would break down.
GAAP tends to be rules-based, offering detailed guidance for specific transactions and industries. This contrasts with IFRS, the international standard used in most countries outside the United States, which takes a more principles-based approach. The two frameworks share the same broad goals — transparent, comparable reporting — but diverge in their treatment of inventory valuation, revenue recognition, and other areas. Convergence efforts between FASB and the IASB have narrowed some of these differences, though full alignment hasn’t been achieved.
Related terms
- Accrual accounting — the accounting method GAAP requires, where transactions are recorded when earned or incurred rather than when cash changes hands
- Financial statements — the reports (balance sheet, income statement, cash flow statement) that GAAP governs
- IFRS — the international counterpart to GAAP, issued by the IASB