Definition of GAAP
GAAP is the acronym for generally accepted accounting principles. In the U.S., GAAP consists of the following:
- The basic underlying accounting principles, assumptions, and concepts such as the cost principle, matching principle, full disclosure principles, etc.
- The detailed reporting standards and other rules issued by the Financial Accounting Standards Board (FASB) and its predecessor the Accounting Principles Board which are now organized into the FASB Accounting Standards Codification (FASB ASC)
- generally accepted industry practices
GAAP must be adhered to when a company distributes its financial statements to anyone outside of the company. If a corporation's stock is publicly traded, the financial statements must also comply with the rules of the U.S. Securities and Exchange Commission (SEC). This includes having its financial statements audited by an independent, registered CPA firm.