Why is GAAP important when preparing Company Financial Statements?
Taking care of the books and finances of companies in the US calls for a basic understanding of Generally Accepted Accounting Principles (GAAP). As a standard set of accounting rules and norms recognized by American entrepreneurs, established businesses in the country adhere to the regulations set in the GAAP without hesitation.
As companies deal with their business operations, their accounting needs naturally follow. For a company to continue operations and know what steps they can take next, they must first ensure that their financial statements are in order. This is the reason why GAAP should be embedded in a company's culture.
To give you a clearer perspective on the basics of GAAP, here are some of the reasons why this accounting principle is extremely vital in the creation and interpretation of financial statements:
GAAP Accounting Importance
Taking charge of your business cash flow is complicated in itself. The good news is you can do something to improve the process: the use of GAAP.
By following these standards, you can have access to more accurate and consistent financial data, since your financial processes are patterned after GAAP.
For companies, relevancy in creating financial statements is a pre-requisite in the pursuit of a successful cash flow. With the use of GAAP Accounting, you can change the entire process of putting your financial information together. Through these standardized accounting terms and principles, using financial data with similar benchmarks becomes a breeze.
When it comes to your business finances, making the slightest mistake can lead to serious money troubles. This is why you must take extra caution in making sure that your financial statements are generated accurately using a credible set of principles. By adhering to the standards set by GAAP, you can reduce the risk of fraud and error in your financial statements.
While working out your critical business numbers is difficult enough, doing the math on your own will likely make it more complicated. Using GAAP can improve the process, because it brings in a unique scale in reporting the financial progress of your business.
In contrast, generating your financial statements using various accounting terms and principles can have a negative impact on the results of your financial reporting initiatives. This is especially the case when you are comparing notes and collaborating with other businesses.
The importance of GAAP in businesses in the US cuts across the phase and size of an enterprise. So, the next time you begin to doubt the value of GAAP in your financial statements, think about its role in making your financial information consistent, relevant, credible and uniform.
Read Next: 4 Ways to Do Financial Statement Analysis
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This post was first published on 9 October 2014 and edited 23 June 2023. Edited by: Aly Tagamolila