
Using standard accounting methods benefits any small business. For those looking to level up their financial reporting, adopting generally accepted accounting principles (GAAP) can unlock new opportunities but also involve challenges.
This guide defines GAAP, who uses them, and how regulation works. Explore GAAP accounting principles to understand the key concepts.
What is GAAP?
GAAP stands for generally accepted accounting principles. It's a comprehensive framework of guidelines, principles, and standards governing how publicly traded companies prepare and present financial information. Nonprofits and private businesses use GAAP accounting to standardize bookkeeping practices or meet stringent reporting requirements.
GAAP's purpose is to provide investors, regulators, and creditors with financial statements that are comparable and understandable. However, it also offers financial accounting, inventory management, and bookkeeping guidelines.
Since GAAP is mainly used in the United States, it's called the U.S. GAAP. The global equivalent is the international financial reporting standards (IFRS).
Who uses GAAP?
Publicly traded companies are required to comply with GAAP, which is enforced by the U.S. Securities and Exchange Commission (SEC). However, many other businesses and nonprofits follow GAAP to demonstrate transparency and consistency in financial reporting.
Examples of companies that might use GAAP in accounting include the following:
- Startups and small businesses looking for funding, potential buyers, or partners can use GAAP to satisfy reporting and accounting requirements.
- Regional banks and private insurance firms must adhere to strict regulatory requirements that usually align with GAAP, even though they aren’t public companies.
- Healthcare providers, energy firms, and government contractors might need to produce GAAP-compliant financial reports.
- Fast-food, retail, and fitness franchisors may mandate GAAP standards across locations to standardize reporting.
- Nonprofits may need to prepare GAAP-compliant financial statements to meet grant requirements or donor standards or maintain 501(c)(3) tax-exempt status.
GAAP's purpose is to provide investors, regulators, and creditors with financial statements that are comparable and understandable. However, it also offers financial accounting, inventory management, and bookkeeping guidelines.
Principles of GAAP
GAAP accounting principles are key concepts you can use to understand broader topics. Many accounting textbooks, courses, and educators cite 10 to 12 foundational ideas.
The core principles include:
- Accrual principle: Record transactions when they occur, not when money is exchanged. GAAP requires the accrual basis method of accounting.
- Monetary unit principle: Log transactions in the same currency without adjusting for inflation.
- Economic entity principle: Separate financial activities and records for each owner, business entity, or subsidiary.
- Periodicity principle: Establish specific accounting periods for financial reporting, such as months, quarters, or years.
- Cost principle: Record assets at their original purchase price, not the market or inflation-adjusted value.
- Revenue recognition principle: Acknowledge revenue when it's earned, not when cash is received.
- Matching principle: Record expenses in the same period as the revenues they help generate.
- Full disclosure principle: Provide all information needed to ensure clarity and transparency in financial statements using footnotes when necessary.
- Going concern principle: Assume the business will remain open unless you have evidence to the contrary.
- Consistency principle: Apply accounting methods consistently. If you make changes, disclose and explain them.
- Materiality principle: Focus on decision-making details and ignore insignificant information that doesn’t improve or affect the overall understanding.
- Conservatism principle: If uncertainty exists, choose the less optimistic solution that results in lower profits or asset valuations to avoid overestimating financial health.
How GAAP is regulated nationwide
The Financial Accounting Foundation an independent, private-sector, not-for-profit organization, oversees the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).
Both boards are responsible for maintaining accounting and reporting standards. The GASB guides state and local governments, whereas FASB maintains GAAP for public and private companies and not-for-profit organizations. FASB publishes the Accounting Standards Codification, a digital, frequently updated resource. Auditors, businesses, and other stakeholders offer public input to proposed changes.
The SEC enforces GAAP compliance for publicly traded companies by requiring accurate statements and forms. It can take legal action or impose fines for noncompliance. The American Institute of Certified Public Accountants provides additional guidance for private companies and accountants.
At the state level, boards of accountancy require CPAs to understand GAAP for licensing exams, continuing education, and professional practice. Third-party auditors may also review financial statements for public or private companies to confirm GAAP compliance and report discrepancies.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.

