GAAP and Why It May be Important to Your Organization’s Success

What is GAAP?

GAAP, or Generally Accepted Accounting Principles, are a set of uniform procedures and practices for financial accounting and reporting to ensure consistency and comparability across different periods and different entities.

GAAP were developed jointly by the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB) and apply to all for-profit, non-profit and governmental organizations; however, not all organizations are required to produce financial statements that comply with GAAP.

GAAP specifies how an organization presents its balance sheet and the results of its operations and ensures easy comparability – enabling interested parties to look at two sets of books from two different periods or two different organizations and compare them apples to apples.

What are the core principles of GAAP?

GAAP stipulates the following:

• Recognition: what items need to be included in the financial statements and when they should be recognized
• Measurement: what the amounts of the items should be; for example, what constitutes net income and operating cash flow
• Presentation: how the items above should be organized on financial statements to ensure consistency
• Disclosure: what other information should be included to provide a more comprehensive understanding of the financial statements, including any risks or uncertainties

How GAAP can benefit you and your organization.

When businesses first start out, the focus is usually on operations. Leaders want to understand how much money they have, how much they owe others, how much product they have on hand, etc. As they grow, external parties often need this same information.

Though reporting your financials under GAAP is not mandatory, it can be beneficial, especially if you may need to raise capital or prepare for other transactions in the future – or if you, one day, plan to take your business public.

Here are some real-life examples of how GAAP may benefit you:

• A business owner never intended to sell his or her company, but a third party is expressing interest in it and wants to review GAAP financials before making an offer.
• A manufacturing company needs a line of credit to fund purchase orders; however, before the bank issues a line of credit, it first needs to review the company’s GAAP financials.
• A business wants to expand its operations by purchasing property but will need a loan to do so. The bank requires GAAP-basis financials to evaluate the mortgage.

So, if you’re ready to move to the next level and begin using GAAP for your accounting records, contact us today.

In the meantime, discover the 10 benefits of outsourcing your accounting and bookkeeping activities.

And check out this case study to discover why one of our customers needed to transition to GAAP for its accounting records.

Summary

GAAP (Generally Accepted Accounting Principles) provides standardized rules for recognizing, measuring, presenting, and disclosing financial information. While not mandatory for all organizations, GAAP reporting improves transparency and comparability, making it easier to secure loans, attract investors, or prepare for a sale or expansion. For nonprofits, it also ensures compliance and credibility with funders. Adopting GAAP can position your organization for growth and long-term success. ARI helps businesses and nonprofits transition to GAAP-based reporting and maintain accurate financial records.

FAQ Questions

• What is GAAP, and why does it matter for small and mid-sized businesses or nonprofits?

Generally Accepted Accounting Principles (GAAP) are a set of uniform procedures and practices for financial accounting and reporting. Their goal is consistency, transparency, and comparability – so that users of financial statements can trust that different organizations’ books are prepared on the same basis.

GAAP helps small and mid-sized businesses or nonprofits build credibility with lenders, donors, and investors. Reporting your financials under  GAAP  can be beneficial if you may need to raise capital or prepare for other transactions. 

• Which organizations are required to follow GAAP, and which can choose to adopt it voluntarily?

Public companies and some nonprofits or regulated entities are required to follow GAAP. Small businesses and other nonprofits can choose to adopt GAAP voluntarily to enhance financial clarity and preparedness. 

• What are the core principles of GAAP, and how do they impact financial reporting?

Core principles include:

• Recognition: what items need to be included and when they should should be recognized
• Measurement: what the amounts of the items should be
• Presentation: how the items above should be organized to maintain consistency
• Disclosure: what other information should be included

 These core principles ensure that financial reporting is clear, accurate, and standardized across organizations.

• How can GAAP reporting help a business secure loans, investors, or prepare for a potential sale?

GAAP reporting builds trust and makes financials easier to analyze, helping organizations meet lender and investor requirements and streamline due diligence during a sale.

• How does ARI support organizations in transitioning to and maintaining GAAP-compliant financial records?

ARI offers expert outsourced accounting to help set up, transition to, and maintain GAAP-compliant financials, supporting organizations with audits, and compliance.