Generally Accepted Accounting Principles or GAAP as they call it acts as the “guide book” for business accounting in the US. The people behind GAAP wanted these rules to be flexible enough to be used by all kinds of businesses, whether small, private, large, or public, etc.
The major purpose of GAAP in financial accounting is to ensure that anyone interested in any company can get an accurate picture of that organization’s condition by reading its financial statements and the other information available freely. GAAP for small businesses has proved to be very beneficial for potential investors.
7 ways GAAP Accounting helps Small Business
Below mentioned are 7 such generally accepted accounting principles (GAAP) benefits for small businesses:
1. Enhances Comparability
GAAP increases the comparability of financial statements through the process of standardization of GAAP accounting principles and statement methods. Businesses can assimilate their financial standings in different periods and also able to compare the financial reports of similar organizations in the same industry.
Publicly listed companies make their financial information available to people, which provides smaller businesses with the opportunity to compare their financial data with these bigger and more established businesses.
Business organizations can set a benchmark for their performance and enhance their operations based on the results of their study of their comparisons.
2. Increases Stability
GAAP accounting principles dictate that business organizations use the same standardized accounting principles throughout the year, which facilitates trust and reliability.
Similarly, timely and compatible revenue identification and bad debt accounting procedures impact decision-makers and investor’s thinking. By following GAAP inventory accounting and consistent methods, businesses make it simple for stakeholders to study the financial health of the company.
3. Boosts Reliability
GAAP enables the auditors to substantiate the credibility of management’s claims in financial statements, which makes financial reporting more dependable for owners, investors, and other stakeholders.
For example, many times, small-business owners have to present their financial data to creditors when seeking a loan. Submitting audited financial documents make it simple for lenders to study the borrower’s lending requirements and capacity.
Dependable statements also enable management to make better decisions about organizational goals and objectives.
4. Increases Relevance
Various economic events affect the financial well-being and health of a company. GAAP provides standards for documenting acknowledgeable transactions and useful information that the users of those financial documents required to make errorless decisions.
When unable to record major events, especially those that primarily impact the ongoing operations, the usability of the financial documents decreases significantly. GAAP explains and condenses the information required to make financial reporting as relevant and accurate as possible.
5. Facilitates Improvement
Since GAAP provides a standardized level of the recording of financial data for all the companies, it enables small businesses to compare their performance with the overall performance of their competitors and make a note of the areas where they need to make required changes for the betterment of their performance.
You can also judge the various financial models and strategies implemented by other companies, helping you to broaden your perspective on how to run your operations.
It also helps you to understand what you’re up against compared to other businesses your investors have in their interests.
6. Helps to keep track of your Financial Growth
You may think you’ve kept track of all the essential spending in your business, but some spending may have gone unnoticed due to no fault of yours.
GAAP provides you a detailed view of the costs you’ve made in the way your stakeholders and investors will see them. This is your opportunity to use the same detailed eye others will have on how you’re spending your money, and if you’re making the right decisions.
7. Reduces Risk and Fraudulent Activities
GAAP is what your stakeholders use to hold you liable for documenting your finances responsibly, but this process can also make you question other things in your business, like why you are unable to hit your sales expectations, etc.
GAAP provides you the information you require to understand the gaps in your business decisions as well as the mistakes that need rectifying.
These are the seven essential ways GAAP accounting principles benefit small businesses. They play a very important role in boosting the financial growth of these small businesses.
