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.
GAAP stands for Generally Accepted Accounting Principles, a set of accounting principles, procedures and standards developed by the Financial Accounting Standards Board (FASB).
To do that, they developed GAAP.
GAAP is designed to ensure a business’ financial statements provide transparency. The goal is to make sure that all financial information is:
Publicly traded companies in the U.S. must follow GAAP. When accountants compile financial statements for public companies, GAAP insures transparency for the following:
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.
There are 10 principles that define the main objective of 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.
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.