Should Your Business Use GAAP Accounting?

Nick Roell

Feb 22, 2024

Generally Accepted Accounting Principles (GAAP)

It’s easy to understand why lending institutions and investors often require financial statements that comply with the standards of generally accepted accounting principles (GAAP).

GAAP-compliant financial statements provide a level of transparency and reliability that confers added credibility. This is why investors, lenders and creditors often attribute additional weight to GAAP accounting and typically require GAAP-compliant financials as a condition of lending.

But those trying to obtain financing or sell their business are not the only businesses that use GAAP for their financial reporting. Many small and midsized businesses use GAAP accounting for the insight and consistency it provides across categories.

Growth-minded entrepreneurs, whose first encounter with GAAP practices may come as the result of a lender’s request, sometimes continue to use it because of the strategic decision-making it enables.

Benefits of GAAP Financial Reporting

GAAP financials provide a more accurate picture of your business in part because they rely on accrual accounting to record sales revenue and expenses. Since accrual accounting records revenue when it is earned and expenses when they are incurred, there is better alignment of profit and loss from period to period.

This real-time transparency into financial trends is a tremendous advantage when crafting the right strategies for reaching your short and long-term growth targets.

GAAP accounting eliminates common sources of financial misalignment. Examples include:

Gaps between working days in a month versus payroll periods in the month
Upfront payment for a contract that will take months to fulfill
Sales and purchases made on credit
Gaps between expenses incurred and payment due dates
Prepaid rent and other expenses

GAAP accounting aligns revenue and expenses with the time they were incurred, so the Profit and Loss (P&L) statements don’t reflect artificial windfalls or shortfalls.

In addition to ensuring more accurate, real-time financial information, GAAP makes it easier to compare one period to another and identify trends. That’s a solid foundation for making decisions about how to grow your business and when to take advantage of opportunities for growth.

GAAP accounting also provides a window into your financials that can:

Shine a spotlight on anomalies that may indicate fraud or waste
Show where pricing is not keeping up with costs

Implementing GAAP & Other Financial Best Practices

At Kirsch CPA Group, we partner with growth-minded entrepreneurs to provide the holistic accounting and financial advisory services that help you achieve your business and financial goals faster and with less struggle, including converting to GAAP.

With Kirsch as your outsourced accounting partner, you’ll always have the numbers and insights you need to make better decisions.

Don’t let inconsistent or incomplete reporting stand between you and your goals for your business. Contact us today to learn more about how holistic accounting services can drive your business growth.

Learn more about GAAP accounting