GAAP

GAAP is the rulebook for financial reporting. It's a set of accounting standards, principles, and procedures established primarily by the Financial Accounting Standards Board (FASB) that public companies are required to follow and that many private companies use as a baseline. When a CPA says something is "GAAP-compliant," it means it follows these standards.

What GAAP governs

GAAP covers how revenue is recognized (when it can be recorded), how expenses are matched to revenue, how assets and liabilities are valued, what must be disclosed in financial statements, and how depreciation, amortization, and inventory are handled. It exists to ensure that financial statements are consistent, comparable, and reliable across organizations.

Does your small business need to follow GAAP?

If you're a privately held small business with no outside investors requiring audited statements, you're not legally required to follow GAAP. Most small businesses use simplified cash-basis accounting, which is not technically GAAP (GAAP requires accrual accounting). Cash-basis is IRS-compliant and perfectly adequate for tax preparation and day-to-day management. If you ever seek a bank loan, bring in outside investors, or prepare for a business sale, you may need GAAP-compliant (accrual) statements. Your CPA will advise you when that threshold is relevant.

GAAP vs. non-GAAP

You'll sometimes see companies report both GAAP and non-GAAP figures. Non-GAAP usually means they've added back items like stock compensation, restructuring charges, or amortization of acquired intangibles to show "adjusted" performance. This is legal and common — but worth understanding that non-GAAP figures are the company's own version of results, not a standardized number.