Generally Accepted Accounting Principles (GAAP)

Without common rules, each company could report its results in whatever way made it look best. GAAP sets out how transactions should be recorded and presented, such as when revenue can be counted, how assets should be valued and what must be disclosed.

The term most often refers to US GAAP, the framework used by companies in the United States and set by the Financial Accounting Standards Board. Many other countries have their own national GAAP, and most have adopted or aligned closely with International Financial Reporting Standards (IFRS).

GAAP covers topics such as revenue recognition, inventory, leases, depreciation, income taxes and financial instruments. Its rules aim to make financial statements relevant, reliable and comparable over time and between companies.

When reading financial statements, it helps to know which framework was used. US GAAP and IFRS are similar in many ways, but some differences, for example in inventory methods and certain asset values, can affect reported profits and balance sheets. Companies sometimes also report "non-GAAP" figures, which exclude certain items and should be read with care.