GAAP
What is GAAP?
GAAP stands for Generally Accepted Accounting Principles, the standard framework for financial reporting in the United States. GAAP ensures consistency, comparability, and transparency in financial statements. The Financial Accounting Standards Board issues GAAP guidance. Public companies must follow GAAP, and many private companies and lenders also require GAAP-compliant statements.
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GAAP vs tax basis accounting
GAAP and tax rules often differ. Depreciation methods vary. Revenue recognition timing can differ. Some tax deductions are not GAAP expenses. Many small businesses maintain tax basis books for simplicity and prepare GAAP adjustments only when required by lenders or investors. Understand on which basis your statements follow.
When GAAP compliance matters
Banks often require GAAP statements for loans above certain thresholds. Investors and acquirers expect GAAP. Auditors issue opinions on GAAP compliance. If you anticipate needing outside capital, establish GAAP-compliant accounting before you need it. Converting from tax basis to GAAP under deadline pressure is expensive and stressful.
Frequently asked questions
Do small businesses have to follow GAAP?
Not always. GAAP is required for public companies, and lenders, investors, or buyers may require it from private ones. Many small firms keep simpler books and convert only when asked. If outside capital or a sale is likely, adopt GAAP practices early so the numbers hold up under review.
What is the difference between GAAP and cash basis accounting?
Cash basis records revenue and expenses when money moves. GAAP uses accrual accounting, which records revenue when it is earned and expenses when they are incurred. Accrual statements give a more accurate picture of performance, which is why lenders and investors usually prefer them.
Related terms and guides: financial statements, accrual accounting, audit-ready books, balance sheet, and financial versus managerial accounting.