Minding the GAAP




McDonalds founder Ray Kroc once said, “It’s easy to have principles when you’re rich. The important thing is to have principles when you’re poor.”

Small Business owners know that if they don’t have principles, they can soon wind up bankrupt and that their number one job is to protect their business by establishing a strong set of principles.

Which is why so many small business owners are minding the GAAP.

What is GAAP?

GAAP stands for Generally Accepted Accounting Principles, a set of accounting principles, procedures and standards developed by the Financial Accounting Standards Board (FASB).

The FASB is a non-profit organization with members appointed by the SEC and approved by Congress who are tasked with improving financial transparency to help investors make more informed decisions.

To do that, they developed GAAP.

What Does GAAP Do?

GAAP is designed to ensure a business’ financial statements provide transparency. The goal is to make sure that all financial information is:

  • Third-party Auditable and
  • Comparable to other organizations’ financial
  • Comprehensible to those using the
  • Represent a company’s true financial

Publicly traded companies in the U.S. must follow GAAP. When accountants compile financial statements for public companies, GAAP insures transparency for the following:

  • Revenue
  • Balance sheet
  • Materiality

The goal of GAAP is to ensure complete, consistent, and comparable financial statements so that an investor can quickly inspect and compare the financial health of companies they may want to invest in. All thanks to GAAP.

The 10 Key Principles of GAAP

There are 10 principles that define the main objective of GAAP.

  • Principle of Regularity: Ensures that accountants and CPAs strictly adhere to GAAP rules, regulations, and standards.
  • Principle of Consistency: Accounting firms apply consistent standards throughout the entirety of the financial reporting process, ensuring financials are easily comparable from one reporting period to the next.
  • Principle of Sincerity: GAAP-compliant accountants are committed to creating an accurate and impartial depiction of a company’s financial situation.
  • Principle of Permanence of Methods: Consistent procedures are used to create all financial
  • Principle of Non-Compensation: Whether positive or negative, an organization’s performance will be reported with no prospect of debt compensation.
  • Principle of Prudence: Financial data is reported accurately and free of
  • Principle of Continuity: It must be assumed that a business’ operations will continue, therefore its assets should be valuated as such.
  • Principle of Periodicity: Revenue reporting should be aligned to reporting periods, such as quarters or fiscal years.
  • Principle of Materiality: Full disclosure of an organization’s monetary condition must be
  • Principle of Utmost Good Faith: All parties are assumed to be acting

Why Use GAAP?

It’s important to note that not every business uses GAAP accounting.

Many small businesses believe that GAAP accounting does not accurately reflect their success. Others may balk at using GAAP feeling that its reporting procedures are more expensive than their own method or that a business’ unique or complex business sector could restrict GAAP’s effectiveness to report accurate financials.

The usefulness of GAAP lies in its transparency, uniformity, and comparability of financial documents. GAAP delivers financial reports that investors and regulators can easily use to assess a business’s financial health.

Without these standards and practices, businesses could publish reports that have discrepancies, are confusing, and increase the potential for fraud.

Bottom Line

GAAP helps maintain trust and confidence in the financial markets through transparent reporting. Without GAAP, investors may be reluctant to trust financial information, resulting in a less robust economy.

For a small business owner, GAAP can help you look ahead and reduce your financial risks by giving you detailed information on business spending and provide consistent quarter-to-quarter analysis of your financials.

If you want to make your business stronger and become a better, more savvy business owner, it’s time to mind the GAAP.

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