GAAP.
In plain English
GAAP, generally accepted accounting principles, is the set of standards that govern how U.S. companies measure, record, and present financial information. The Financial Accounting Standards Board writes the standards, and the Securities and Exchange Commission requires public companies to follow them in their filings. GAAP covers when revenue counts as earned, how costs are matched to periods, and what has to be disclosed in the footnotes. The point is comparability: if every company invented its own method, a profit number would mean nothing across firms. GAAP does not promise a company is healthy, only that the reporting follows a common rulebook.
01Why it matters
If you read a company's numbers before investing, or hand financials to a bank for a small-business loan, GAAP is the reason the figures mean roughly the same thing from one company to the next.
02The math, step by step
Say a software firm signs a 12,000 dollar annual contract in January and collects all of it up front. Under GAAP the firm records 1,000 dollars of revenue a month (12,000 divided by 12), not 12,000 dollars in January. The cash arrived once. The revenue shows up across twelve periods.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
It is not the tax code. GAAP governs the statements a company gives investors and lenders. Tax rules govern what a company reports to the IRS. The same business routinely shows different profit under each set of rules, and that gap is normal, not a red flag.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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