Generally Accepted Accounting Principles (GAAP)
The standard set of accounting rules and guidelines used by US businesses for financial reporting, set by the Financial Accounting Standards Board (FASB).
Detailed Explanation
GAAP defines how revenue is recognized, how assets and liabilities are measured, how leases and stock-based compensation are reported, and dozens of other rules that drive comparability across companies. Public companies must report in GAAP under SEC rules. Private companies often follow GAAP for lender or investor purposes but may use simpler tax-basis or cash-basis reporting internally. International companies generally use IFRS instead. The transition between GAAP and tax-basis numbers is reconciled on Schedule M-1 (Form 1120) or Schedule M-3.
Key Points
- The common US framework for financial reporting, set by the Financial Accounting Standards Board (FASB).
- Required for SEC-reporting public companies; often used by private companies for lenders and investors.
- Covers revenue recognition, asset and liability measurement, leases, and stock-based compensation.
- GAAP (book) income often differs from taxable income; the difference is reconciled on Schedule M-1 or M-3.
- International companies generally use IFRS, a separate standard set.
Practical Example
A company recognizes $1,000,000 of GAAP revenue from a multi-year contract under the standard's recognition rules, but for tax it may report a different amount in the same year. The book-to-tax difference shows up on Schedule M-1 of Form 1120, reconciling the financial statement net income to the taxable income on the return.
Related TS CPA Service
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Learn about Audit & CompilationRelated Terms
Bookkeeping
The systematic recording, classification, and reconciliation of a business's financial transactions to produce accurate financial statements.
Accrual vs Cash Basis Accounting
Two methods for timing when income and expenses are recognized: cash basis records transactions when money changes hands, accrual records them when economic activity occurs.
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