One of the most thoughtful and hardworking CPAs I’ve ever met once told me that businesses are like fingerprints—each one is unique and has different ways of tracking and sharing financial information internally.
I was brand new to inDinero, and she was helping me understand why GAAP is so essential for so many of our clients. GAAP, or generally accepted accounting principles, has become the guiding light for financial professionals preparing public-facing reports for companies in the United States. Accountants use these principles to create statements that give outsiders an easy-to-understand window into your business’s financial performance in order to compare it alongside other businesses, while still maintaining the individuality of each company’s financial profile.
When should my business transition to GAAP accounting?
GAAP is fundamentally all about timing, so identifying the right time to make the transition from another method is key.
Because going GAAP is a time-consuming process, businesses aren’t required to do it until it’s absolutely necessary. Startups and smaller businesses are able to choose between the cash and accrual methods of accounting, but they aren’t required to adhere to GAAP until they grow to more than $5 million in annual sales or have inventory worth more than $1 million each year.
Aside from that, making the switch typically coincides with a few major events:
- Series A Funding
- Annual IRS Audits
- Board Meetings with Current Investors
- IPO (All publicly traded companies are required by law to report their financials using GAAP.)
At these milestones, investors and others outside your company will be interested in measuring your company’s financial profile side-by-side with multiple others across their portfolios.
If you dive into these situations and your financial statements aren’t prepared using GAAP’s guidelines, most investors will not even consider giving you funding and many others will be very skeptical of your business.
How easy is it to adopt GAAP accounting? Well, it depends…
This might sound intimidating but there’s no need to worry. As I mentioned before, going GAAP can require a lot of time spent working with an accountant, especially for those who are currently using the cash basis for accounting instead of accrual.
Download our Comparison Guide: Cash vs. Accrual Accounting: Which is right for your company?
If you’re currently using cash accounting, you will have the added step of adopting the accrual accounting method before going GAAP. This is because accrual is the accepted accounting method under GAAP.
Once you are on accrual you can think of this process as an opportunity to see your company’s entire financial history, free from any of the assumptions you may have been making. You’ll be in for some major digging and lively Q&A with your accountant as they research your historical financial data and correlate your cash flow.
Phew! Now that the scary part is over, remember:
- Making the switch will all be worth it not just for investors, but for you and your business as well. Once the process is said and done, your accounting will be more than just a record of your money made and spent—it’ll be the best business decision-making tool you never knew you could ask for!
- An awesome accountant (like inDinero!) will be your greatest ally in all of the hard work. Think of them as superheroes with calculators who will leave your business stronger than ever before!
Set your company up for a successful switch to GAAP with a helpful checklist
Before you get started, make sure you know what to expect. Our Getting Started with GAAP Accounting Checklist will help you assess whether your company financials are ready to incorporate GAAP’s standards.
Quick Note: This article is provided for informational purposes only, and is not legal, financial, accounting, or tax advice. You should consult appropriate professionals for advice on your specific situation. inDinero assumes no liability for actions taken in reliance upon the information contained herein.