# US GAAP, and where these rules come from

> This system states a lot of accounting rules. Revenue is earned on delivery. Depreciation allocates cost rather than measuring value. A statement of cash flows has three sections and reconciles to the change in cash. A posted entry is reversed, never edited.

Source: https://lopifi.com/docs/domain/13-us-gaap
Part of: Lopifi — US GAAP books on autopilot, reviewed by a CPA (https://lopifi.com)

---

# US GAAP, and where these rules come from

This system states a lot of accounting rules. Revenue is earned on delivery. Depreciation allocates
cost rather than measuring value. A statement of cash flows has three sections and reconciles to the
change in cash. A posted entry is reversed, never edited.

Every one of those has an authority behind it, and a component that encodes a rule without naming its
source is asking to be trusted on nothing. So this document is the map: what is **required** by US
GAAP, what is **presentation convention**, and what is simply **the mechanics of bookkeeping** — three
different kinds of claim that get flattened into "best practice" everywhere else.

The machine-readable copy of this table lives in `src/learn/sources.ts`. It is rendered on every
lesson of the course at `/learn`, on every glossary term page, and asserted against this document by
`tests/course.test.ts` — so a citation cannot be added in one place and forgotten in the other.

---

## The hierarchy

**The Codification is authoritative GAAP.** There is one source, and everything in it carries the same
weight:

> This Statement establishes the Codification as the source of authoritative GAAP recognized by the
> FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under
> federal securities laws are also sources of authoritative GAAP for SEC registrants. All guidance
> contained in the Codification carries an equal level of authority.
>
> — [FASB Statement No. 168, ¶6 (June 2009)](https://storage.fasb.org/fas168.pdf)

**Concepts Statements are not GAAP.** They define what an asset *is*; they do not tell you what to do.
The Conceptual Framework says so about itself: a Concepts Statement does not "amend, modify, or
interpret the Accounting Standards Codification." We quote CON 8 for the definitions of the elements
because they are the clearest statement of what those words mean — not as a requirement.

**This is US GAAP only.** An entity reporting under IFRS answers to different numbers (IAS 1, IAS 7,
IFRS 15) and in places to different rules. Nothing in this system should be read as saying the two are
interchangeable.

**Access.** The Codification is free to read at [asc.fasb.org](https://asc.fasb.org/) after
registration. Where a quotation below could not be pulled from the Codification itself, the "read in"
column names the openly readable document the text was verified in, and the date it was checked.

---

## What is required, what is convention

| Claim this system makes | Kind | Authority |
|---|---|---|
| Assets, liabilities, equity, revenue and expenses have precise definitions | Concept | CON 8, Ch. 4, ¶E16, ¶E37, ¶E61, ¶E80–E81 |
| Revenue is recognized when control transfers, not when cash arrives | **Required** | ASC 606-10-05-3, -05-4; 606-10-25-23, -25-30 |
| A cost paid ahead of consumption is an asset until consumed | **Required** | ASC 340-10 |
| Cash taken before delivery is a liability, not revenue | **Required** | ASC 606-10-45 (contract liability) |
| A cost incurred and unbilled is accrued into the period | **Required** (accrual basis) | CON 8 accrual concept, ASC 405 |
| Depreciation allocates cost over useful life; it is not a valuation | **Required** | ASC 360-10-35-4 |
| Finite-lived intangibles amortize over their useful life; prepaid costs are expensed as consumed | **Required** | ASC 350-30-35; ASC 340-10 |
| A balance sheet presents position; a P&L presents a period | **Required** | ASC 210, ASC 220, ASC 205 |
| Cash flows are classified operating / investing / financing | **Required** | ASC 230-10-45-10 |
| The indirect method separately reports the change in receivables, inventory and payables | **Required** | ASC 230-10-45-28, -45-29 |
| The statement reconciles opening to closing cash | **Required** | ASC 230-10-45-24 |
| An error is corrected and disclosed, not quietly overwritten | **Required** | ASC 250-10-45 |
| Materiality is not a fixed percentage | SEC staff guidance (registrants) | SEC SAB No. 99 |
| A registrant's balance sheet uses prescribed captions | **Required** (SEC registrants) | Reg S-X, 17 CFR 210.5-02 |
| A published non-GAAP measure is reconciled to the GAAP measure | **Required** (SEC registrants) | Reg G; Item 10(e) of Reg S-K |
| Negatives are parenthesised; subtotals take a single rule and totals a double rule | Convention | Presentation practice — not codified |
| Debit is the left column and credit the right | Mechanics | Bookkeeping convention — not codified |
| Debit and credit are two columns rather than one signed number | Mechanics | Bookkeeping convention — not codified |
| A chart of accounts has 1000s for assets, 2000s for liabilities | Convention | Not prescribed by GAAP |
| Nearly every lease puts a right-of-use asset and a lease liability on the balance sheet | **Required** | ASC 842-20-25-1 (short-term lease election: 842-20-25-2) |
| Receivables carry an allowance for lifetime expected credit losses from day one | **Required** | ASC 326-20 (CECL) |
| Deferred taxes are measured at enacted rates and reduced by a valuation allowance when realization is not more likely than not | **Required** | ASC 740-10-30 |
| Events after the balance sheet date are recognized only if the condition existed at that date | **Required** | ASC 855-10-25 |
| A parent consolidates what it controls and eliminates intercompany balances | **Required** | ASC 810-10-45-1 |
| Monetary items are remeasured through earnings; translation differences go to OCI | **Required** | ASC 830-20-35-1; ASC 830-30-45 |
| Segregation of duties, approval chains, evidence, audit trail | Internal control | SOX §404 — SEC Release 33-8238 |

The distinction in the middle column is the point of the table. A component that renders a negative in
parentheses is following a convention, and someone is entitled to disagree with it. A component that
renders a customer deposit as revenue is wrong, and no amount of taste makes it right.

---

## Recent standards this system tracks

Accounting Standards Updates amend the Codification; until an ASU is effective for an entity, the
superseded text still governs it. A component that encodes a rule from an ASU states which version it
follows. Effective dates below are for calendar-year entities unless noted, and are checked against
FASB's ASU pages and the large-firm summaries as of October 2026.

| ASU | Topic | What changes for the UI | Effective |
|---|---|---|---|
| 2016-02 | ASC 842 Leases | ROU asset and lease liability on the balance sheet; maturity analysis | In effect for all entities |
| 2016-13 | ASC 326 Credit losses (CECL) | Lifetime expected-loss allowance replaces incurred loss | In effect for all entities |
| 2023-07 | ASC 280 Segments | Significant segment expenses provided to the CODM, annually and interim | PBEs: fiscal years beginning after 15 Dec 2023; interim after 15 Dec 2024 |
| 2023-08 | ASC 350-60 Crypto assets | In-scope crypto measured at fair value through net income, presented separately | Fiscal years beginning after 15 Dec 2024 |
| 2023-09 | ASC 740 Income taxes | Rate reconciliation by prescribed category; income taxes paid by jurisdiction | PBEs: annual periods beginning after 15 Dec 2024; others after 15 Dec 2025 |
| 2024-03 / 2025-01 | ASC 220-40 Expense disaggregation | Footnote splitting expense captions into inventory purchases, employee compensation, D&A and other | PBEs: annual periods beginning after 15 Dec 2026; interim after 15 Dec 2027 |
| 2025-05 | ASC 326 Credit losses | Practical expedient for current AR and contract assets; private-entity election to consider subsequent collections | Annual periods beginning after 15 Dec 2025 |
| 2025-06 | ASC 350-40 Internal-use software | Project stages removed; capitalize once funding is committed and completion is probable | Annual periods beginning after 15 Dec 2027 |

Outside GAAP but on the same screens: from 2026 the Form 1099-NEC and 1099-MISC reporting threshold rises
from $600 to $2,000 (One Big Beautiful Bill Act, July 2025), and under IFRS, IFRS 18 replaces IAS 1 for
annual periods beginning on or after 1 January 2027.

---

## The sources, and what we read

Every quotation in this system was read in the document named here, on the date named here. Nothing in
this table was recalled from memory.

| Cite | What it says | Read in | Access |
|---|---|---|---|
| [FASB Statement No. 168, ¶6](https://storage.fasb.org/fas168.pdf) | The Codification is the source of authoritative GAAP | Same document (PDF) | Free |
| [ASC 105-10](https://asc.fasb.org/105/tableOfContent) | Generally Accepted Accounting Principles — Overall | Codification | Registration |
| [CON 8, Ch. 4, ¶E16](https://www.fasb.org/concepts-statements) | "An asset is a present right of an entity to an economic benefit." | Concepts Statement No. 8, Chapter 4 (Dec 2021), PDF | Free |
| [CON 8, Ch. 4, ¶E37](https://www.fasb.org/concepts-statements) | "A liability is a present obligation of an entity to transfer an economic benefit." | As above | Free |
| [CON 8, Ch. 4, ¶E61](https://www.fasb.org/concepts-statements) | Equity is "the residual interest in the assets … after deducting its liabilities" | As above | Free |
| [CON 8, Ch. 4, ¶E80–E81](https://www.fasb.org/concepts-statements) | Definitions of revenues and expenses | As above | Free |
| [CON 8, Ch. 4, App. A](https://www.fasb.org/concepts-statements) | What accrual accounting attempts to do (carried forward from CON 6 ¶139) | As above | Free |
| [ASC 606-10-05-3, -05-4](https://asc.fasb.org/606/tableOfContent) | The revenue core principle and the five steps | PwC Viewpoint, ASC 606 five-step model | Registration |
| [ASC 230-10-45-10](https://asc.fasb.org/230/tableOfContent) | Cash flows are classified as operating, investing or financing | EY FRD, *Statement of cash flows (ASC 230)*, July 2026 | Registration |
| [ASC 230-10-45-28, -45-29](https://asc.fasb.org/230/tableOfContent) | The indirect method, and its minimum reconciling items | As above | Registration |
| [ASC 230-10-45-24](https://asc.fasb.org/230/tableOfContent) | The statement reconciles beginning and ending cash | As above | Registration |
| [ASC 360-10-35-4](https://asc.fasb.org/360/tableOfContent) | Depreciation is "a process of allocation, not of valuation" | PwC Viewpoint, PP&E depreciation overview | Registration |
| [SEC SAB No. 99](https://www.sec.gov/interps/account/sab99.htm) | "Exclusive reliance on … any percentage or numerical threshold has no basis in the accounting literature or the law." | Same document | Free |
| [Reg S-X, 17 CFR 210.5-02](https://www.ecfr.gov/current/title-17/part-210/section-210.5-02) | The balance sheet captions a registrant must present | 17 CFR 210.5-02, 2024 edition (govinfo PDF) | Free |
| [Reg G — SEC Release 33-8176](https://www.sec.gov/rule-release/33-8176) | A non-GAAP measure must be reconciled to the GAAP measure | 17 CFR 244.100(a)(2), Cornell LII | Free |
| [SEC Release 33-8238](https://www.sec.gov/rule-release/33-8238) | Management's report on internal control over financial reporting | Same document | Free |
| [IRS Publication 538](https://www.irs.gov/publications/p538) | The cash and accrual methods, for tax | Same document | Free |

Topic-level pointers used without quotation, because the claim is the topic rather than a paragraph:
ASC [205](https://asc.fasb.org/205/tableOfContent), [210](https://asc.fasb.org/210/tableOfContent),
[220](https://asc.fasb.org/220/tableOfContent), [235](https://asc.fasb.org/235/tableOfContent),
[250](https://asc.fasb.org/250/tableOfContent), [270](https://asc.fasb.org/270/tableOfContent),
[280](https://asc.fasb.org/280/tableOfContent), [310](https://asc.fasb.org/310/tableOfContent),
[323](https://asc.fasb.org/323/tableOfContent), [326](https://asc.fasb.org/326/tableOfContent),
[330](https://asc.fasb.org/330/tableOfContent), [340](https://asc.fasb.org/340/tableOfContent),
[350](https://asc.fasb.org/350/tableOfContent), [360](https://asc.fasb.org/360/tableOfContent),
[405](https://asc.fasb.org/405/tableOfContent), [450](https://asc.fasb.org/450/tableOfContent),
[505](https://asc.fasb.org/505/tableOfContent), [740](https://asc.fasb.org/740/tableOfContent),
[810](https://asc.fasb.org/810/tableOfContent), [830](https://asc.fasb.org/830/tableOfContent),
[842](https://asc.fasb.org/842/tableOfContent), [855](https://asc.fasb.org/855/tableOfContent).

---

## Metrics are not GAAP

Everything in [Metric definitions](10-metrics.md) — ARR, EBITDA, net burn, runway, magic number — is a
**non-GAAP financial measure**. That is not a criticism; they are often the most useful numbers a
company has. It does have a consequence, and it is a legal one for anyone who files:

> A reconciliation (by schedule or other clearly understandable method), which shall be quantitative
> for historical non-GAAP measures presented …
>
> — [Regulation G, SEC Release 33-8176 (January 2003)](https://www.sec.gov/rule-release/33-8176)

So a metric component in this system states its formula, states its inputs, and never presents itself
with the visual authority of a statement line. Every metric term in the glossary carries the Reg G
citation for the same reason.

---

## What this document is not

It is not accounting advice, and it is not a substitute for the standard. The Codification runs to
thousands of pages of judgment that no component library can encode, and the moment a real question
appears — a contract with variable consideration, a lease with a renewal option, a functional currency
that is not obvious — the answer is in the standard and in the judgment of a qualified accountant, not
in a React component.

What this system can do, and does, is refuse to render something that is wrong under any reading:
revenue that is really a deposit, a negative rendered as a minus in a statement, a null balance shown
as `$0.00`, a posted entry with an edit affordance. Those are the errors that survive review because
they look finished.

---

## See also

- [Accounting model](01-accounting-model.md) — double-entry, normal balances, the sign problem
- [Statement semantics](03-statement-semantics.md) — what each statement asserts and how they articulate
- [Schedules & accruals](04-schedules-and-accruals.md) — the schedules behind the adjusting entries
- [Lexicon](11-lexicon.md) — every term, with its authority
- [Metric definitions](10-metrics.md) — the non-GAAP layer, with its formulas