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What is GAAP?

GAAP is the acronym for generally accepted accounting principles. In the U.S. that means

  1. the basic accounting principles and guidelines such as the cost principle, matching principle, full disclosure, etc.,
  2. the detailed standards and other rules issued by the Financial Accounting Standards Board (FASB) and its predecessor the Accounting Principles Board, and
  3. generally accepted industry practices.

GAAP must be adhered to when a company distributes its financial statements outside of the company. If a corporation's stock is publicly traded, the financial statements must also adhere to rules established by the U.S. Securities and Exchange Commission (SEC). This includes having its financial statements audited by an independent CPA firm.