Generally accepted accounting principles (GAAP) are the accounting rules used to prepare financial statements for publicly traded companies and many private companies in the United States.

In the United States, as well as other countries practicing English common law system, the government does not set accounting standards, in the belief that the private sector has better knowledge and resources. The GAAP is not written in law, although the SEC requires that it be followed in financial reporting by publically traded companies.

Conceptual frame work

GAAP has four basic principles. The historical cost principle requires companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities. The revenue recognition principle requires to record when revenue is realized or realizable and earned, not when cash is received. The way of accounting is called accrual basis accounting. The third principle is the matching principle. Expenses have to be matched with revenues as long as it is reasonable doing so. The last principle is called the full disclosure principle. Amount and kinds of information disclosed should be decided based on trade-off analysis as larger amount of information costs more to prepare and use it. Information disclosed should be enough to make judgement while keeping costs reasonable.

Setting GAAP

Those organizations influence developing GAAP in the United States.

GAAP is composed of various documents. Accounting Principles Board (APB) dissolved in 1973 and the FASB took over the responsibility setting up the standards.

House of GAAP
Category (d)
(Least authoritative)
AICPA Accounting InterpretationsFASB Implementation Guides (Q and A)Widely recognized and prevalent industry practices
Category (c)FASB Emerging Issues Task ForceAICPA AcSEC Practice Bulletins
Category (b)FASB Technical BulletinsAICPA Industry Audit and Accounting GuidesAICPA Statements of Position
Category (a)
(Most authoritative)
FASB Standards and InterpretationsAPB OpinionsAICPA Accounting Research Bulletins