What is GAAP: What US accounting standards mean for founders and finance teams

When it comes to accounting standards, there’s one thing that investors, governments, and lenders universally accept: the Generally Accepted Accounting Principles (GAAP).

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When it comes to the lives of a CFO and their finance team, certain compliance-related functions are a non-negotiable part of the job, such as:

• Closing the books on time
• Getting meaningful reports out to management
• Making sure you’re in good shape to pass any audit
• And combining all of the above to comply with GAAP rules

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When accounting practices are operating well, everyone takes them for granted, but they’re a constant pain point if they are operating poorly. GAAP standards, such as the principle of continuity, are at the heart of accounting fundamentals.

Understanding GAAP in accounting

The Generally Accepted Accounting Principles (GAAP) are a standardized framework of financial guidelines that companies and organizations in the United States must follow when preparing and presenting financial statements. These principles help investors, governments, and other stakeholders to assess financial performance.

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GAAP compliance is constantly evolving as the business environment changes. GAAP changes are typically issued by the Financial Accounting Standards Board (FASB). Some of the most recent changes to GAAP standards include new revenue recognition and lease accounting rules for accounting periods beginning on or after January 1, 2026.

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GAAP principles include guidelines for revenue recognition, expense recognition, liabilities, and asset valuation. 

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While there are some variations from country to country, US-based companies conform to the same set of GAAP. This standardization enables investors and other stakeholders to compare financial statements from different organizations. Globally, the International Financial Reporting Standards (IFRS) serve a similar purpose for companies outside the United States, despite key differences in areas like depreciation and reporting practices.

Who uses GAAP?

Certified Public Accountants (CPAs) and bookkeepers use GAAP to prepare compliant financial statements and tax returns. Investors, market analysts, and state and federal regulators look for GAAP compliance to understand a company’s financial rigor.

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Internally, GAAP simplifies performance comparisons across accounting periods. GAAP principles like the principle of sincerity—which emphasizes honest and accurate financial reporting—help businesses maintain accountability. This leads to better management decisions, more profitable businesses, and healthier economies.

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“To attract financing to hire workers, build plants, and invest in research and development, companies and organizations must report financial information that investors, lenders, and donors find credible and useful,” —The Financial Accounting Foundation

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While the FASB develops accounting standards, the U.S. Securities and Exchange Commission regulates financial reporting and disclosures by publicly traded companies in the United States. For companies operating internationally, aligning with GAAP and IFRS may be necessary to meet diverse stakeholder expectations.

When do businesses need to follow GAAP?

Public companies are required to adhere to GAAP for all financial reporting to comply with SEC regulations. While private companies are not obligated to follow these standards, many choose to do so to improve financial transparency and build trust with stakeholders.

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"Usually, growing companies, startups, and companies that want to be acquired would benefit from using GAAP, especially if they track their KPIs and have budgets and projections," says Armine Alajian, CPA and founder of the Alajian Group.

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Companies often need to prioritize GAAP compliance when they:

• Seek external investment or funding
• Plan for an acquisition or IPO
• Work with government contracts
• Require consistent financial statements across multiple periods

What does GAAP cover?

GAAP provides detailed guidelines for consistent and transparent financial reporting, ensuring that organizations follow standard practices across three main areas:

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• Recognizing and Recording Transactions: Guidelines on how to recognize and record assets, liabilities, revenues, and expenses in financial statements.
• Structuring Financial Statements: Standards for displaying line items, subtotals, and totals to ensure clear and comparable financial data.
• Providing Supporting Information: Requirements for disclosing essential details that investors, analysts, and regulators need to evaluate the organization’s financial health.

Key accounting principles of GAAP

To fully comply with GAAP, businesses follow a set of foundational principles that provide structure and accountability in financial reporting.

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"One of the most critical principles is consistency, which ensures that the same standards are applied throughout the entire reporting process across all accounting periods," explains Alajian. "When necessary, any changes to these standards must be documented, maintaining transparency."

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Some of the other core principles that guide GAAP compliance include:

• Principle of Regularity: Accountants must adhere to established rules and regulations, ensuring standardized practices.
• Principle of Consistency: Accounting methods must remain uniform across reporting periods. For example, if a company uses the straight-line method for depreciation, it should continue to use this method unless a justified change is documented.
• Principle of Sincerity: Financial statements should reflect the company’s true financial position. For instance, revenues and expenses should be reported accurately without manipulation.
• Principle of Prudence: This principle emphasizes caution by avoiding the overstatement of assets or income. For example, companies record anticipated losses as soon as they are identified.

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GAAP in practice: what it means for your books

GAAP accounting is based on accrual basis accounting, meaning that revenue is recorded when earned, and expenses are posted when incurred to generate revenue. This differs from the cash flow basis technique—more common among small businesses and solopreneurs—where revenue is recorded based on cash inflows, and expenses are posted based on cash outflows.

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Accrual accounting posts revenue and expenses to the proper period, giving businesses a better picture of their financial data:

• Accrual accounting involves double-entry accounting, meaning that the total dollar amount of debits equals credits for every transaction and that each transaction involves at least two different accounts.

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Assume you sell $8,000 of inventory on November 10th, and your buyer agrees to pay $2,500 monthly for four months. If you use the cash basis of accounting, you record $2,500 in revenue each month for 4 months. The $8,000 in inventory is reclassified to cost of goods sold based on when your business paid for the inventory. The difference between $10,000 revenue and $8,000 cost of goods sold is profit (increase to net income).

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The accrual method requires two journal entries on November 10th. You increase accounts receivable and revenue by $10,000. You also increase the cost of goods sold and decrease inventory by $8,000. The $10,000 in revenue less the $8,000 cost of goods sold increases net income as profit.

Implementing GAAP compliance in your organization

Creating a strong foundation for GAAP compliance requires investment in people, processes, and technology. Start by building a team of experienced accountants who understand GAAP standards and can implement them effectively. 

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Establish clear internal controls that define your accounting practices and policies. This includes documenting who processes transactions, who approves them, and how they're recorded. Create structured workflows for accounts payable, accounts receivable, and expense management to maintain consistency and reduce errors.

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Modern finance teams can streamline GAAP compliance through automation. Ramp's spend management platform automatically categorizes transactions and maintains detailed audit trails, making it easier to follow GAAP principles like consistency and regularity. The platform integrates with your accounting software to ensure accurate revenue recognition and expense matching.

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Regular audits serve as a crucial checkpoint for GAAP compliance. Consider establishing an audit committee to oversee your accounting operations and ensure you have adequate resources to maintain compliance. This proactive approach helps you build credibility with stakeholders, from potential investors to market regulators.

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