Accounting
GAAP (Generally Accepted Accounting Principles)
The U.S. standard set of accounting rules used in audited financial statements, set by FASB and required for most lender, investor, and audit contexts. The reference frame that makes financials comparable across businesses.
GAAP is set by FASB (Financial Accounting Standards Board) and is the framework for U.S. financial reporting. Public companies and many private companies (audit-required, lender-required, investor-required) follow GAAP.
Smaller private businesses often follow modified GAAP or simply accrual-basis books that don't meet the full standard. Audits and bank covenants can require formal GAAP compliance.
The five most-relevant recent GAAP updates for small businesses to know: ASC 606 (revenue recognition, effective 2018-19), ASC 842 (lease accounting, private companies effective 2022), ASC 326 CECL (credit losses, mostly financial institutions), ASU 2016-01 (equity investments at fair value), and continuing R&D capitalization changes. Each is a project's worth of work to adopt correctly and each is a common source of QoE adjustments in acquisitions.
The private-company alternatives (PCC) narrow the gap for small businesses. Under PCC, private companies can elect to amortize goodwill over 10 years (rather than annual impairment testing), simplify hedge accounting, and skip the variable-interest-entity consolidation for common-control leases. Adopting the PCC alternatives shrinks the audit surface without giving up the GAAP label.
Below full GAAP, the two informal tiers are 'GAAP-lite' (accrual books with most GAAP conventions but skipping ASC 842, ASC 606 for simpler contracts, and the more esoteric disclosures) and 'tax basis' (books maintained to match the tax return). Most owner-run small businesses run GAAP-lite for lender purposes and tax basis for the tax return, then bridge with a Schedule M adjustment. Understanding which framework your books are in matters when a buyer or investor asks.
Common pitfalls
- Claiming 'GAAP financials' for lender reporting when the books skip ASC 606 or ASC 842 — banks and QoE teams check
- Failing to adopt ASC 842 lease accounting after the private-company effective date; the missed leases are one of the fastest ways to earn an audit qualification
- Skipping GAAP because the business is small — a lender or acquirer will require it retroactively, and cleanup is much harder than staying current
- Assuming tax-basis and GAAP-basis P&Ls should agree on the bottom line; timing differences on depreciation, revenue, and deferred items produce real gaps
- Ignoring the PCC alternatives; they materially simplify small-business GAAP compliance without giving up the label
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Have a GAAP (Generally Accepted Accounting Principles) situation in your business?
Monthly close, accrual-basis financials, and a ledger that holds up when a lender, a buyer, or an examiner asks to see it.