What Is GAAP in Accounting?

In the United States, companies that make public financial disclosures must use a standardized system of accounting methods and practices. These methods and practices are collectively known as generally accepted accounting principles (GAAP), which facilitate:

• Consistency across all financial disclosures
• Accurate analysis of an organization's financial standing
• Direct comparisons between competing businesses

In addition to publicly traded companies, GAAP is widely used in governmental accounting. Many businesses also voluntarily adopt GAAP for their internal financial tracking.

Many bachelor's programs in accounting cover GAAP in their curricula. To better understand these important accounting principles, learn more about how they work in this guide.

What Are the Basic Principles of Accounting?

GAAP-compliant accounting practices draw on many different principles, which students often encounter in their coursework and training.

Notable guidelines separate an organization's transactions from the personal transactions of its owners, standardize currency units used in reports, and explicitly disclose the time periods covered by specific reports. They also draw on established best practices governing cost, disclosure, matching, revenue recognition, professional judgment, and conservatism.

Examples of essential GAAP principles include:

• Principle of Regularity: GAAP-compliant accountants strictly adhere to established rules and regulations.
• Principle of Consistency: Consistent standards are applied throughout the financial reporting process.
• Principle of Conservatism: This principle guides accountants to use high levels of caution and diligence when verifying data and preparing entries and documents, especially in cases involving uncertainty.
• Principle of Matching: When reporting revenues, accountants should match those revenues with their associated costs by simultaneously reporting any expenses the organization incurred in generating them.
• Principle of Non-Compensation: All aspects of an organization's performance, whether positive or negative, are fully reported with no prospect of debt compensation.
• Principle of Prudence: Speculation does not influence the reporting of financial data.
• Principle of Continuity: Asset valuations assume the organization's operations will continue.
• Principle of Periodicity: Reporting of revenues is divided by standard accounting periods, such as fiscal quarters or fiscal years.
• Principle of Materiality: Financial reports fully disclose the organization's monetary situation.
• Principle of Utmost Good Faith: All involved parties are assumed to be acting honestly.

History of GAAP

Without regulatory standards, companies would be free to present financial information in whichever format best suits their needs. With the ability to portray a company's fiscal standing in a favorable light, investors could be easily misled.

The Great Depression in 1929, a financial catastrophe that caused years of hardship for millions of Americans, was primarily attributed to faulty and manipulative reporting practices among businesses. In response, the federal government, along with professional accounting groups, set out to create standards for the ethical and accurate reporting of financial information.

According to accounting historian Stephen Zeff in The CPA Journal, GAAP terminology was first used in 1936 by the American Institute of Accountants. Federal endorsement of GAAP began with legislation like the Securities Act of 1933 and the Securities Exchange Act of 1934, laws enforced by the U.S. Securities and Exchange Commission (SEC) that target public companies. Today, the Financial Accounting Standards Board (FASB), an independent authority, continually monitors and updates GAAP.

All 50 state governments prepare their financial reports according to GAAP. The Governmental Accounting Standards Board (GASB) estimates that about half of the states officially require local and county governments to adhere to GAAP.

Non-GAAP Reporting

Some organizations use non-GAAP, or "pro forma" accounting methods. Businesses that are legally required to use GAAP in their public financial disclosures for compliance reasons sometimes use pro forma methods in their other financial statements. Similarly, organizations that are not bound by GAAP compliance requirements may also prefer pro forma accounting.

Pro forma accounting offers one important advantage: Businesses can use it to create customized financial projections and forecasts without GAAP restrictions. As Harvard Business School notes, pro forma accounting excels at generating insights into hypothetical "what-if" scenarios while GAAP does not.

However, pro forma accounting may contain unspecified estimates and assumptions. Pro forma financial statements are also unaudited and may include little contextual information, and they often lack the inherent comparability facilitated by GAAP. For these reasons, pro forma financial statements can be misleading, inconsistent, and less transparent despite appearances to the contrary.

Limitations of GAAP

GAAP is designed to prevent reporting inconsistencies and errors, but the system still has some limitations. For example, compliant organizations require significant internal accounting expertise, which is expensive. Additional limitations and issues apply to:

What Is the IFRS?

The International Accounting Standards Board (IASB) develops, publishes, and oversees the accounting principles enshrined in IFRS practices. According to IASB data from March 2025, 147 global jurisdictions mandate the use of the IFRS system for most or all public financial disclosures that impact their financial markets.

Because U.S. companies use GAAP rather than IFRS, complexities and inconsistencies can occur in international business settings. Publicly traded domestic U.S. companies must use GAAP, but U.S. businesses with a significant international presence may also issue financial statements prepared according to IFRS guidelines.

Since 2002, the FASB and IASB have collaborated on strategies for minimizing inconsistencies arising from competing accounting systems. As of March 2025, the most recent impactful collaborative development occurred in 2013, when the FASB joined a 12-member advisory board working toward converging the GAAP and IFRS systems.

IFRS vs. GAAP

Other than the fact that IFRS is adopted globally and GAAP is used U.S., the major difference between them relates to rules vs. principles. Despite the word "principles" in its name, the GAAP system is rules-based and has largely inflexible requirements. Meanwhile, IFRS standards are principles-based, offering more flexibility when interpreting guidelines.

While both systems intend to protect the integrity and accuracy of financial disclosures, they also diverge in significant ways. The following table offers a high-level summary of some of the major differences between them:

Frequently Asked Questions About GAAP