What is GAAP (generally accepted accounting principles)

GAAP (generally accepted accounting principles) is a collection of commonly followed accounting rules and standards for financial reporting. The acronym is pronounced gap.

GAAP specifications include definitions of concepts and principles, as well as industry-specific rules. The purpose of GAAP is to ensure that financial reporting is transparent and consistent from one public organization to another, and from one accounting period to another.

GAAP emerged in the 1970s and involved the following four major rules and standards:

Accrual accounting methods. GAAP uses accrual accounting, which records revenue when a service or good is sold but not when payment is received; direct expenses for goods sold are recorded when a sale is transacted, and indirect expenses are recorded when expenses are paid.

Depreciation and capital expenditures. Costs of major asset acquisitions are accounted for over the entire life of the asset. For example, an item with a 10-year life is accounted for at 10% for 10 years.