Guides
What Is GAAP? The Principles of U.S. Accounting
GAAP (generally accepted accounting principles) is the common set of accounting rules, standards, and conventions that U.S. companies follow when they prepare financial statements. It is written and maintained by the Financial Accounting Standards Board (FASB) and codified in the FASB Accounting Standards Codification. The goal is consistent, comparable financial reporting so investors, lenders, and regulators can read one company’s numbers against another’s.
The Securities and Exchange Commission (SEC) requires every U.S. publicly traded company to report under GAAP. Private companies, nonprofits, and state and local governments often follow it too, frequently because lenders or grant agencies demand GAAP-basis statements.
What Does GAAP Stand For and What Does It Cover?
GAAP stands for generally accepted accounting principles. It is the U.S. framework that governs how organizations recognize revenue, value assets and liabilities, classify equity, record expenses, and present the four core financial statements: the balance sheet, income statement, cash flow statement, and statement of changes in equity.
GAAP is a mix of broad principles and detailed, rule-level guidance. The broad principles include regularity (accountants follow the established rules), consistency (the same methods apply period to period), and conservatism (recognize likely losses early, gains only when realized). Below those principles sit thousands of specific rules on topics like leases, revenue, and income taxes.
The framework applies most strictly to public companies, which the SEC mandates. Private entities may use GAAP by choice or by contract, or may instead use a special-purpose framework such as cash-basis or tax-basis accounting. The choice between methods often turns on entity type and reporting obligations, as covered in our guide to cash vs accrual accounting.
Who Sets GAAP? The FASB as Standard-Setter
The Financial Accounting Standards Board (FASB) is the private, independent body that writes U.S. GAAP for nongovernmental entities. Created in 1973, FASB operates under the oversight of the Financial Accounting Foundation (FAF) and derives its authority from the SEC, which has recognized FASB standards as authoritative since 2003.
FASB is a seven-member board supported by a technical staff. It issues new and amended rules through documents called Accounting Standards Updates (ASUs), each of which amends the Codification rather than standing alone. FASB does not set the rules for governments; that is the job of the Governmental Accounting Standards Board (GASB), a sister board under the same FAF umbrella.
The standard-setting process is public. FASB adds a topic to its agenda, issues an Exposure Draft, collects comment letters, holds public roundtables, then votes to finalize an ASU with a stated effective date. For a running view of recent updates and their adoption, see the FASB Standards Report.
Three bodies divide U.S. standard-setting responsibility:
| Body | Sets standards for | Oversight |
|---|---|---|
| FASB | Public and private companies, nonprofits (nongovernmental GAAP) | Financial Accounting Foundation |
| GASB | State and local governments | Financial Accounting Foundation |
| SEC | Public-company reporting rules that sit on top of GAAP | U.S. federal government |
What Is the Accounting Standards Codification (ASC)?
The FASB Accounting Standards Codification (ASC) is the single, official source of authoritative U.S. GAAP for nongovernmental entities. It launched on July 1, 2009, and became authoritative for interim and annual periods ending after September 15, 2009. Everything outside the Codification, other than SEC guidance, is nonauthoritative.
Before 2009, GAAP was scattered across FASB Statements (FAS), Interpretations (FIN), Emerging Issues Task Force consensuses, and other documents. The Codification pulled all of that into one structured research tool with roughly 90 topics, so a preparer looks up one reference instead of chasing multiple pronouncements. Legacy citations like FAS 109 and FIN 48 were folded into ASC 740.
The ASC organizes GAAP into nine areas, numbered in hundreds, with three-digit topics nested inside each area.
| ASC area | Range | What it covers |
|---|---|---|
| General Principles | 100s | Broad concepts underlying GAAP |
| Presentation | 200s | How statements are laid out |
| Assets | 300s | Inventory, receivables, PP&E, intangibles |
| Liabilities | 400s | Obligations and contingencies |
| Equity | 500s | Stockholders’ equity transactions |
| Revenue | 600s | Revenue recognition |
| Expenses | 700s | Cost recognition and allocation |
| Broad Transactions | 800s | Business combinations, leases, fair value, derivatives |
| Industry | 900s | Industry-specific rules |
Widely cited topics show this scheme in action: ASC 606 governs revenue recognition, ASC 842 governs lease accounting, ASC 740 governs income taxes, and ASC 805 governs business combinations. Each links to a detailed Ledgerism walkthrough, for example our explainer on ASC 606 revenue recognition and on ASC 842 lease accounting.
GAAP vs IFRS: How the Two Frameworks Differ
GAAP is the U.S. framework set by FASB; IFRS (International Financial Reporting Standards) is the framework set by the International Accounting Standards Board and used in more than 140 countries. GAAP is often described as more rules-based, with detailed and industry-specific guidance, while IFRS is more principles-based, relying more on professional judgment. The SEC requires U.S. domestic filers to use GAAP, not IFRS.
The two frameworks converged on major topics like revenue and leases, but real differences remain in how specific items are measured. The table below summarizes the most-cited distinctions as of 2026.
| Topic | U.S. GAAP | IFRS |
|---|---|---|
| Overall approach | More rules-based, detailed | More principles-based, judgment-driven |
| Standard-setter | FASB | IASB |
| Where used | United States (SEC-mandated for public filers) | 140+ countries |
| Inventory costing | FIFO, weighted average, specific ID, and LIFO permitted | LIFO prohibited |
| Asset revaluation | Prohibited except marketable securities | Revaluation to fair value allowed for PP&E, intangibles, and more |
| Impairment reversals | Prohibited for all asset types | Allowed for most assets (not goodwill) |
| Interest and dividends in cash flows | Interest and dividends received in operating; classification is largely fixed | May be classified in operating or financing sections |
One upcoming shift on the IFRS side: IFRS 18, which reshapes the income statement structure, is effective in 2027. GAAP has no direct equivalent change on the same timeline. Companies operating across borders often maintain reconciliations between the two frameworks, which adds cost and is a common driver of restatement risk.
Why GAAP Matters
GAAP exists so that financial statements mean the same thing across companies. Its modern roots trace to the 1929 stock market crash and the Securities Act of 1933 and Securities Exchange Act of 1934, which pushed the profession toward standardized reporting after opaque practices contributed to the crisis.
For a public company, GAAP compliance is not optional; audited GAAP financials are the price of access to public capital markets. For a private business, following GAAP can lower borrowing costs, because a lender reading a GAAP-basis balance sheet knows the numbers were built on consistent rules. To see those rules applied to real statements, read our guides on how to read a balance sheet and how to read an income statement.
Frequently Asked Questions
What does GAAP stand for?
GAAP stands for generally accepted accounting principles. It is the standardized set of accounting rules and conventions that U.S. entities use to prepare and present financial statements. The framework is written by the Financial Accounting Standards Board (FASB) and compiled in the FASB Accounting Standards Codification, which has been the single authoritative source of U.S. GAAP since 2009.
Who is required to follow GAAP?
The SEC requires all U.S. publicly traded companies to report under GAAP. Private companies, nonprofits, and other organizations often follow GAAP by choice or by lender or grant requirements, though some private entities use tax-basis or cash-basis accounting instead. State and local governments follow a separate framework set by the Governmental Accounting Standards Board (GASB) rather than FASB.
Who creates and updates GAAP?
The Financial Accounting Standards Board (FASB), a private body created in 1973 and overseen by the Financial Accounting Foundation, writes and updates U.S. GAAP for nongovernmental entities. FASB issues changes through Accounting Standards Updates (ASUs), each amending the Codification. The SEC has recognized FASB as the authoritative standard-setter for public companies since 2003.
What is the FASB Accounting Standards Codification?
The FASB Accounting Standards Codification (ASC) is the single official source of authoritative U.S. GAAP for nongovernmental entities. It launched July 1, 2009, and reorganized thousands of prior pronouncements into roughly 90 topics across nine areas. Familiar citations like ASC 606 (revenue), ASC 842 (leases), and ASC 740 (income taxes) all come from this structure.
Is GAAP the same as IFRS?
No. GAAP is the U.S. framework set by FASB, while IFRS is the international framework set by the IASB and used in more than 140 countries. GAAP tends to be more rules-based, and IFRS more principles-based. Differences remain in areas like inventory costing (GAAP allows LIFO, IFRS does not) and asset revaluation. The SEC requires U.S. domestic public filers to use GAAP.
What are the basic principles behind GAAP?
Core GAAP principles include regularity (accountants follow established rules), consistency (the same methods apply across periods), and conservatism (recognize likely losses promptly and gains only when realized). These sit above detailed, topic-level rules on revenue, leases, income taxes, and other areas. Together they aim to make financial statements accurate, comparable, and transparent across companies.
Reviewed by The Ledgerism Editorial Team. Last reviewed: July 2026.