The Importance
There are several good reasons to use GAAP standards and to hire a bookkeeper who knows GAAP. If you're seeking investment capital to grow your business, your potential investors will want nothing less. Even if a virtual bookkeeper is managing your small business bookkeeping and financial accounting, we feel it's important for business owners to know the basics of what goes in to accurate accounting.
GAAP principles largely relate to the ways and the timeframes in which revenue and expenses are recorded, in order to assure an accurate picture of a company's current finances and financial future.
Anyone making financial projections based on cash flow statements, profit and loss statements and balance sheets is reasonably assured of accurate financial forecasting if the financial statements adhere to basic standards.
There are several good reasons to use GAAP standards and to hire a bookkeeper who knows GAAP. If you're seeking investment capital to grow your business, your potential investors will want nothing less. Even if a virtual bookkeeper is managing your small business bookkeeping and financial accounting, we feel it's important for business owners to know the basics of what goes in to accurate accounting.
GAAP principles largely relate to the ways and the timeframes in which revenue and expenses are recorded, in order to assure an accurate picture of a company's current finances and financial future.
Anyone making financial projections based on cash flow statements, profit and loss statements and balance sheets is reasonably assured of accurate financial forecasting if the financial statements adhere to basic standards.
The consistency of GAAP financial statements makes it easy for any investor to come in and read your balance sheets and financial statements; they will look the same, offering the same information in the same order, as any other company's balance sheets. This makes it easy for investors to compare businesses and decide which is the better investment - or to decide if your business is a good investment at all.
The Full Disclosure Principle, which is one of the 11 primary GAAP principles, states that your bookkeeper includes all relevant information in the financial statements, either in the statements themselves or in the accompanying notes. This assures potential investors that your balance sheets tell the truth - and the whole truth.
Would you want to invest in a company if you didn't understand or trust their financial statements? That's the importance of the Generally Accepted Accounting Principles when you're seeking investment capital.
GAAP, the Generally Accepted Accounting Principles, which are the U.S. standards for bookkeeping practiced by all bookkeeping firms and all bookkeepers, including virtual bookkeepers, are formed from 11 basic principles:
1. The Business Entity Concept - If you've ever heard the term "piercing the corporate veil," this principle covers that illegal practice. It says that business accounting must be kept separate from the personal expenses and income of the owner.
2. The Continuing Concern Concept - This values a business's assets under the assumption that the company will continue to stay in business. (For instance, assets from office supplies to machinery may drop in value if a business is suddenly closing.)
3. The Principle of Conservatism - A virtual bookkeeper or accountant should not paint an unusually rosy or bleak picture of a company's financial present or future. It should be fair and realistic.
4. The Objectivity Principle - Different from the Principle of Conservatism, this principle deals with financial reporting and states that accounting figures should be recorded based on objective evidence. Any one else looking at the same reports and same financial records would arrive at the same figures.
5. The Time Period Concept - Financial accounting takes place over specific time periods of the same length: months, quarters, years.
6. The Revenue Recognition Convention - Revenue should be recognized in the balance sheets when it is collected, now when it is earned.
7. The Matching Principle - Every expense item must be recorded in the same accounting period as the revenue it earned.
8. The Cost Principle - Purchases are recorded at their cost, not their value.
9. The Consistency Principle - If you use accrual based accounting, which is recognized as adhering to GAAP standards, you must continue using accrual based accounting, and not switch to a cash based accounting method. This is related to financial statements - IRS allows a business keeping accrual books to file taxes using cash basis accounting.
10. The Materiality Principle - This is the clause that helps make sure GAAP standards make sense for accountants. This principle states that GAAP must be followed except when doing so would be expensive or difficult and it would make no difference in the company's net income or the ability to read the financial statements. In other words, if you want to break GAAP, you should have a good reason and breaking GAAP won't affect the financial statements significantly.
11. The Full Disclosure Principle - Information affecting anyone's full understanding of a company's financial statements must be included with those statements. This information might be provided in the form of notes that accompany the financial statements.
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