Generally Accepted Accounting Principles (GAAP) Defined

What are Generally Accepted Accounting Principles (GAAP)?

By Adam Levy – Updated Oct 12, 2025 at 8:59 PM

Key Points

GAAP ensures public companies report finances consistently for clear investor comparisons.
GAAP adherence is mandated by the SEC, crucial for comparing financial performance.
Understanding GAAP helps investors analyze and compare portfolio companies effectively.

Generally accepted accounting principles, or GAAP, is a set of accounting standards followed by most U.S. businesses, nonprofit organizations, and state and local governments. GAAP is industry shorthand used to denote the standardized guidelines that specify how and what companies report to the public.

Interested parties, such as investors, lenders, and potential donors, expect companies to adhere to GAAP reporting standards so that they can understand an organization's financial performance and compare it to others. Let's take a closer look at these generally accepted principles and who uses them.

Loading paragraph...

IPO

IPO (Initial Public Offering) is the first sale of stock by a private company to the public, making it a publicly traded entity.

Loading paragraph...

A graphic comparing the differences between generally accepted accounting principles vs. non-GAAP measurements. — Image source: The Motley Fool.

Loading image...

Loading paragraph...

Revenue

Revenue is a business’s gross income or the amount of money it brings in from regular operations before costs are considered.

Loading paragraph...

How to Invest in Stocks: 5 Steps to Get Started

Are you ready to jump into the stock market? We've got you. Build long-term wealth using The Motley Fool's market-beating method.

GAAP vs. Non-GAAP: Everything You Need to Know

Public companies must use generally accepted accounting principles but also at times do their own thing.

How to Pick a Stock for the First Time

Becoming a good stock-picker takes time and talent. We show you the way.

How to Calculate the Net Worth on Financial Statements

The net worth of a business is also known as its book value or its owners' (stockholders') equity.

Loading hub_pages...

Accountants devote their entire careers to understanding and applying the specific rules that the FASB establishes in accordance with GAAP. Knowing at least the basics of GAAP can help investors better understand and compare the companies in their portfolios.

Loading paragraph...

About the Author

Adam Levy is a contributing Motley Fool stock market analyst covering technology, consumer, and financial stocks and how policy, economic, and consumer trends shape personal finance, Social Security and retirement savings. Before The Motley Fool, Adam was a financial advisor at Edward Jones. He studied finance and electrical engineering at Carnegie Mellon University.

TMFnCaffeine

@admlvy

The Motley Fool has a disclosure policy.