WHY YOU MUST

MIND THE GAAP

A single accounting, tax filing,

inDinero.com and payroll solution for businesses
 CONTENTS

3 WHAT GAAP IS

5 WHAT MAKES GAAP IMPORTANT

7 WHY GAAP IS DIFFERENT

10 WHY YOU SHOULD LOVE GAAP

12 WHAT GAAP MEANS FOR TAXES

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WHAT GAAP IS
 While it may have a reputation for being a
somewhat monotonous industry, accounting
can become surprisingly abstract and
subjective without a standard set of rules
to follow. Every accountant technically
has the ability to assign value or categorize
expenses in a slightly different way. As
you can imagine, if there was no code of
conduct, this could cause utter anarchy!

GAAP to the rescue!

GAAP, or generally accepted accounting principles,
is essentially the Magna Carta of accounting in the
United States and establishes the standard financial
reporting definitions and styles that are uniform across
all businesses. If you’re a banker, auditor, accountant,
or CPA these are the rules you play by, and luckily,
because every accounting and finance professional
agrees to use GAAP, businesses can be measured by
the same yardstick. This creates a more level playing
field for everyone.employees for long.

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 WHAT MAKES
GAAP IMPORTANT
 Why GAAP matters
to your business
Without a firm stake in the ground, deciphering a
business’ finances or comparing one business to
another would be extremely complicated. If bankers,
venture capitalists, and auditors can’t make out what
your reported figures stand for, it will be virtually
impossible for them to give you loans, confidently
invest in your company, or verify your tax information.
Startups are not required to adhere
to GAAP until they grow to more than
$5 million in annual sales or inventory
worth more than $1 million each year.
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When You Should
Use GAAP
Any publicly traded company in the United
States is required by law to report their
financials using GAAP. This is so any outside
individuals who aren’t familiar with the
business can still decisively trade stocks.
Other milestones that indicate when a
company should start using GAAP include
but are not limited to:
• Series A funding
• Annual audits
• Board meeting presentations
to current investors
Startups and smaller businesses are able
to choose between the cash and accrual
methods but are not required to adhere
to GAAP until they grow to more than
$5 million in annual sales or inventory
worth more than $1 million each year.
 WHY GAAP
IS DIFFERENT
 GAAP (or Accrual) vs. Cash
To understand GAAP you need to be familiar with
the two methods used for reporting finances: cash
and accrual. In cash accounting, expenses and
income are recorded as the actual money comes
in and goes out of your bank. On the other hand,
accrual accounting records these sales or services as
they are earned, spent, or performed, whether actual
payments are received or not.
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Example:
Say you run an online dating website and you
allow customers to purchase subscriptions for one
flat rate annually (instead of month to month).
If you are using the cash method for your
accounting, each payment would only appear as
income once a year in a single lump sum from the
month the subscriber purchased their membership.
If you are using the accrual method for your
accounting each subscription would break that
annual amount into monthly (or even daily, hourly,
minute-to-minute, second-to-second) increments
that align with your services throughout the year.
Both methods provide a lot of wiggle room for
creative accountants–especially with the accrual
method. In an effort to build more structure around
this practice, auditors established a list of principles,
assumptions, and constraints and GAAP was born.
As a form of accrual accounting, GAAP reports all
transactions when they are earned, used, or due
instead of when payment is procured and follows
guidelines to ensure uniformity.
 Some differentiators in GAAP
There are assumptions, principles, and constraints
that go along with GAAP method:
 One can safely assume that a company
using GAAP is an independent, long-term
business entity that operates on a widely
accepted currency.
 Accountants must prepare each financial
statement using impartial evidence to keep
figures as unbiased as possible.
 They must focus on only releasing information
that is relevant to making decisions and
judgments about the company.
 Unlike other accounting methods,
companies using GAAP must keep their
methods and principles consistent every
time they report in order to show accurate
financial patterns over time.
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 Reports should be as conservative as possible
and assume less favorable situations and
underreported figures. For example, our
dating site would have to wait to record their
subscriptions from a promo until they actually
occur but would record any lost customers at the
earliest time they can be assumed, even if they
had a 30 day cancellation policy.
 Accountants must prepare each financial
statement using impartial evidence to keep
figures as unbiased as possible.
 When preparing reports, accountants
should only report specific products, items,
etc. if they are significant enough to influence
decision makers.
 To provide a more direct picture of profitability
and performance accountants focus on
establishing a correlation between the cost of
products purchased and the revenue of goods
that get sold.
 WHY YOU
SHOULD LOVE GAAP
 Business benefits of GAAP
If you’re reading this article, you’re probably a
business owner, not an accountant, and are less
interested in the definitions of cash, accrual, and
GAAP. You’d probably rather be focusing on the
value your business can get from each method.
The major distinguishing advantage of accrual
and GAAP over cash accounting all comes down
to one thing: timing.
In cash all you can recognize is what you receive,
when you receive it. This can put you at risk
for forgetting things like settling your accounts
receivable, recognizing interest income, etc.
Cash doesn’t help your investors. While you can
do more to manipulate your accounting with the
cash method, it lacks to ability to recognize the costs
you’ve accrued, which investors will want to know.
When using cash you’re subject to other people’s
unpredictable behaviors and actions so there’s no
way to be absolutely sure what you can expect to
come or when.
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GAAP/Accrual recognizes transactions in real-time
so they can be handled in real-time. This way tasks
are less likely to fall by the wayside because you
can handle them as they happen instead of waiting
around to be paid.
GAAP provides a more accurate understanding
of what you owe and what you own and can match
your expenses to the revenue it will earn. By forcing
you to question why you’re not hitting expectations,
accrual can even help you diagnose issues such as
gaps in earning capabilities, collection issues, etc.
By comparison, GAAP/accrual is almost like
a crystal ball for strategizing and provides a more
accurate picture of your revenue and identify and
predict cash flow trends. Being able to anticipate
your finances for the future provides invaluable
information for building out your business model
or planning for department operations.
 WHAT GAAP
MEANS FOR TAXES
 GAAP tax implications
Everybody’s taxes are like snowflakes, each one is
unique and needs to be handled on a case by case
basis. As a viable business, you pay taxes each year
based on your net profit revenue. Because you have
a different objective when preparing your tax return
than your accounting statement, you could have
another strategy to consider when choosing
an accounting method.

With cash accounting you are responsible for paying

taxes on all income when it is received. If we look
at the dating site example, when a subscriber signs
up on November 1st that income is taxable for that
entire year–even though there are only two months
of a subscription used.

The IRS sets a threshold for the total sales and

So while you will want to prepare your accounting
revenue a C corporation can reach before they
to present the most honest and healthy outlook on
are required to file their taxes under accrual. With
your profitable income, your tax strategy will rely
GAAP/accrual, our dating site would only account
on what responsibilities and deductions you qualify
their November subscriber as income for those
for. Simply put, if you have the choice–don’t have to
two months that year–and would continue to
worry about IRS regulations–it boils down to when
regard that as income earned/service provided
you want to claim responsibility for your earnings
on taxable statements over the following ten
and what will be the most optimal time to do it.
months in the next year.

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