Mind the GAAP! What Operations Professionals Should Know About GAAP Compliance

 In Best Practices, Blog
GAAP compliance is important for competitive businesses.

GAAP compliance is important for competitive businesses.

For the thriving, product-centric manufacturing or distribution company, generally accepted accounting principles (or GAAP) are important considerations for you as you look to grow. If your end goal is to sell your company for a tidy profit, or if you’re hoping to attract investors, GAAP compliance is of particular importance.

The purpose of GAAP compliance is to create a fixed standard for financial reporting. By adhering to GAAP principles, you’re ensuring that your company’s account statements meet a certain standard that those familiar with GAAP compliance are able to readily interpret. When your financial reporting meets this standard, you engender a level of trust and confidence from outside investors (or other interested parties) that you wouldn’t be able to achieve if you were not GAAP compliant. 

“Compliance with GAAP is an important part of any business. It not only provides the owner the comfort of knowing that their financial statements accurately reflect the business, but not following GAAP principles can significantly impact your ability to obtain financing and insurance.”

John Carrier, C.F.O. and C.O.O. at SalesPad, summed it up this way:

“Compliance with GAAP is an important part of any business. It not only provides the owner the comfort of knowing that their financial statements accurately reflect the business, but not following GAAP principles can significantly impact your ability to obtain financing and insurance.”

GAAP compliance is not something you can simply buy into, unfortunately. No one accounting software guarantees that you are adhering to all of the GAAP principles. Certain software platforms, however, do make it easier to achieve GAAP compliance. For example, Sage Inacct is a cloud-based accounting solution that equips you with the tools your business needs to become GAAP compliant.

As a specific example of how accounting software can affect your company’s ability to be GAAP compliant, Carrier referenced audit trails. 

“Different software packages make it easier or harder to stay compliant depending on whether they have the right tools in place,” he said. “Providing a good, reliable audit trail for all transactions is essential — for example, software that allows for deleted transactions to disappear for good within your system is not in accordance with GAAP. It is always good to understand what tools exist within your system to help ensure your company stays compliant.”

So how do you know whether or not your company is GAAP compliant? The best way to determine this is to hire a certified public accountant. They can help you set up your accounting system to meet the current GAAP requirements. Beyond the initial setup, have a CPA firm periodically perform an audit or review of your business’s finances to help assess compliance, as GAAP rules are frequently updated. 

“GAAP is always changing,” said Carrier. “New rules are added all the time, such as ASC606, which went into effect in 2019 and is related to revenue recognition for certain contracts. We encourage you to discuss with your accounting firm what other changes in GAAP need to be taken into consideration in order for your business to stay compliant.”

If all this compliance and principles talk has you nervous, check out our quick primer on the key accounting terms you need to know (then call your accountant when you’re done).

Accounting Terms for Distribution Professionals

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