Generally Accepted Accounting Principles (GAAP) Defined

What are Generally Accepted Accounting Principles (GAAP)?

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

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.
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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.

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IPO

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

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6. Prudence

Accountants should be prudent and conservative when deciding which accounting methods to use. A prudent approach ensures a company's financial performance is not overstated.

7. Continuity

Accounting should be conducted based on the assumption that a company will continue to operate indefinitely. If an accountant is required to make any assumptions, those assumptions should be based on historical precedents set by the business.

8. Periodicity

Financial data should be reported at regular intervals to allow for easy comparison among reporting periods and companies.

9. Materiality

All material financial data and information should be disclosed. Anything that affects a company's financial standing is generally considered material, meaning companies must provide full financial disclosure.

10. Utmost good faith

Accountants and business managers should act in good faith by honestly recording transactions and collecting financial data.

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

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Revenue

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

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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.

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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.

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