Generally Accepted Accounting Principles (GAAP) Cheat Sheet

You sold $80,000 last month on Amazon and Shopify combined. Your bank balance went up by $12,000. Your accountant asks what your revenue was, and you realize you have three possible answers depending on which number you look at.

That gap is what generally accepted accounting principles are for. GAAP is the shared rulebook that decides when a sale counts as revenue, when a cost counts as an expense, and how the two line up. Without it, your numbers are just a description of your bank account.

Most sellers we talk to have heard the term and assume it’s something only public companies worry about. That’s half right. The rules are mandatory for some businesses and optional for others, and knowing which side you’re on saves you from either over-engineering your books or under-building them right before you need a loan.

Here’s what GAAP is, the ten principles in plain language, and how to tell whether your store actually needs to follow it.

What Is GAAP?

GAAP stands for generally accepted accounting principles, the standard set of rules US businesses follow when they prepare financial statements.

The rules exist so that two companies reporting $1 million in revenue mean the same thing by it. Without a shared standard, one business could count a sale the day an order comes in and another could wait until the money clears, and their income statements would not be comparable.

GAAP is maintained by the Financial Accounting Standards Board, or FASB. Their Accounting Standards Codification is the authoritative source, and it has been the single reference point for US GAAP since 2009. The Securities and Exchange Commission recognizes FASB as the standard setter for public companies, and state accountancy boards and the AICPA treat those standards as authoritative too.

Who Actually Has to Follow GAAP?

Compliance is mandatory in some situations and voluntary in most others.

You’re required to follow GAAP if you’re a publicly traded company, if you’re filing with the SEC, or if a specific contract obligates you. Beyond that, it becomes a practical requirement rather than a legal one:

• ●Bank loans and lines of credit. Most lenders want GAAP-compliant statements before they’ll underwrite anything meaningful.
• ●Outside investors. Anyone buying equity will expect books they can compare against other deals.
• ●Selling your business. Buyers and their accountants will normalize your numbers to GAAP anyway. Doing it yourself first means you control the narrative.
• ●Larger suppliers and 3PLs. Some ask for financial statements before extending credit terms.

If none of those apply, you’re free to run your books however you like. Most sellers under seven figures do exactly that, and it’s a reasonable choice.

The 10 Principles of GAAP, In Plain English

The ten principles are less a checklist than a set of habits. Here’s what each one means for a store owner.

• ●Regularity. You follow the rules consistently rather than picking the treatment that makes a given month look better.
• ●Consistency. You use the same methods period to period. Switching inventory valuation halfway through a year makes your own trend data useless.
• ●Sincerity. Your statements reflect what actually happened, without spin.
• ●Permanence of methods. The procedures behind your numbers stay stable, so this quarter can be compared to last.
• ●Non-compensation. You report the good and the bad separately. A great month on one SKU doesn’t get netted against a return-heavy disaster on another.
• ●Prudence. You record revenue when it’s reasonably certain and expenses when they’re reasonably possible. When in doubt, be conservative.
• ●Continuity. You assume the business keeps operating, which is what justifies spreading an asset’s cost over several years.
• ●Periodicity. You report on consistent time periods. Monthly closes beat “whenever we get to it.”
• ●Materiality. Your statements disclose anything that would change a reader’s decision. A $30 discrepancy is noise. A $30,000 one is not.
• ●Utmost good faith. Everyone involved is assumed to be reporting honestly.

The two that trip up ecommerce sellers most often are consistency and periodicity. Changing how you value inventory partway through the year, or closing the books three months late, quietly destroys your ability to see what’s working.

Cash vs Accrual: The Choice That Matters Most

GAAP requires accrual accounting, and for an inventory business the difference is not academic.

Cash accounting records revenue when money hits your account and expenses when money leaves it. Accrual records revenue when you earn it and expenses when you incur them, regardless of when cash moves. The IRS treats both as valid methods and requires only that you apply your chosen method consistently, per Publication 538.

Here’s the version that matters for a store. Say you pay a supplier $20,000 in March for inventory that sells across April, May, and June for $50,000.

• ●On a cash basis: March shows a $20,000 loss. April through June show $50,000 of pure profit. Neither picture is true.
• ●On an accrual basis: the $20,000 in cost of goods sold, meaning COGS, gets matched to the months the products actually sold. Every month shows its real margin.

Sellers running cash-basis books routinely think a product is more profitable than it is, because they bought the inventory in a quarter they’ve stopped looking at. If you carry inventory, accrual is the only method that answers the question you actually care about, which is whether this product makes money. Our breakdown of cost of goods sold goes deeper on getting that number right.

What GAAP Looks Like in Practice for a Store

Full compliance is a bigger project than most sellers need. Borrowing the useful parts is not.

Five habits produce most of the benefit:

• ●Close monthly. Twelve comparable data points a year beats one.
• ●Track inventory on accrual. COGS lands in the month the product sold.
• ●Separate business and personal accounts. Mixed accounts cost more to untangle later than they ever save.
• ●Book fees, ad spend, and refunds to the right month. Marketplace costs belong against the sales that caused them.
• ●Use the same categories every month. Your profit and loss statement only means something if the buckets hold still.

None of that requires a CPA on staff. What it requires is someone doing the same thing every month without skipping.

The step most sellers skip is reconciling marketplace payouts. Amazon and Shopify deposit net figures, so gross sales, fees, refunds, and reserves all sit inside one number.

A payout of $12,000 might represent $18,000 in sales, $3,500 in fees, $1,800 in refunds, and $700 held in reserve. Recording the $12,000 as revenue is the most common error we see.

That single shortcut understates your sales and your costs at the same time, which makes your margin look roughly right while both sides of it are wrong. You cannot spot an ad spend problem or a fee increase in a number that already has both netted out of it.

A worked example: the same month, two ways

Say March looks like this. You bought $20,000 of inventory, spent $4,000 on ads, paid $2,600 in Amazon fees, and took in $31,000 of payouts. Of the inventory you bought, roughly $9,000 worth actually sold that month.

Both numbers are arithmetically correct. Only one of them tells you whether March was a good month, and only one lets you compare March to April without doing mental arithmetic about when you happened to reorder.

When to Bring in Help

Doing your own books works until the volume or the complexity outgrows the time you have.

The usual triggers are consistent: you’re carrying real inventory across multiple channels, you’re spending more than a few hours a month on reconciliation, you’re about to raise money or apply for a loan, or you’ve fallen behind and the catch-up feels impossible. Any of those is a reasonable point to hand it off. There’s more detail in our guide to outsourced bookkeeping services if you’re weighing that.

Frequently Asked Questions

Final Thoughts on GAAP for Ecommerce Sellers

You probably don’t need full GAAP compliance. You almost certainly need the parts that make your numbers honest.

Accrual timing on inventory, a consistent monthly close, and clean marketplace reconciliation will tell you which products make money and which ones only look like they do. That’s the actual point. Compliance is a side effect of doing those three things well.

If your books have drifted, or reconciliation is eating a day a month you’d rather spend on the business, our team handles the monthly close for ecommerce sellers so the numbers are ready when you need them.