Benefits of GAAP

The benefits of following GAAP for Small Business:

Many small business owners shy away from anything associated with Generally Accepted Accounting Principles (otherwise known as GAAP) thinking they apply only to large publicly held organizations.  This thinking is far from true, however.  GAAP was created to be a standard "rule book" for organizations to follow, and was intended to be used by all businesses -- small and large, private and public.  Some examples of these standard GAAP rules are:

Revenue Recognition Principle:  Revenue is earned and reported when a service is completed or product is delivered, regardless of when payment is received.

Matching Principle:  Costs of doing business are recorded in the same month as the revenue they help to generate.  This is done by making journal entries to accrue expense (such as cost of goods sold, salaries or contract labor) that has been incurred but not yet paid for or to defer expenses (such as insurance premiums) that are paid in advance and pertain to future months

Consistency Principle:  Financial information of a business is reported each month using the same methods in a consistent manner, so that meaningful comparisons can be made between different time periods.

Following GAAP standards can offer several benefits to small business owners, including:

• It makes it easier for you and potential investors to understand your financials, as reporting is consistently done the same way, for all reporting periods

• Supplies a more accurate way of looking at revenues, so owners can identify and predict cash flow trends and plan ahead for future needs.

• Business costs are aligned with revenues, giving a better picture of what is driving profitability so that owners can make better spending decisions and identify areas for improvement

• Gives a consistent business framework that can help reduce risks and the potential for fraud

• Following GAAP standards may be necessary if your organization is looking to qualify for a government contract

More and more small and medium sized businesses have started to voluntarily follow Generally Accepted Accounting Principles to make their organizations stronger.  Now might be the right time for you to benefit from following GAAP standards as well.  

Sources:

The Impact of GAAP on Small Businesses (azcentral.com)

Big GAAP vs. Little GAAP: Generally Accepted Accounting Principles for Small Businesses (cmp.cpa)

7 Ways GAAP Accounting Benefits Your Small Business - inDinero

Top 6 Benefits of GAAP Accounting for Your Business - Chargezoom