GAAP accounting: What growing businesses need to get right

As your business takes on more complex contracts, financing, or outside investment, the questions around your financial reporting can change, too. A lender may request financial statements, an investor may ask how revenue is recognized on a multiyear contract, or a potential buyer may question recurring year-end adjustments. These requests can bring new attention to accounting processes that have worked well for day-to-day management.

That added scrutiny can also expose gaps between how your business currently accounts for transactions and what GAAP may require. Identifying them early gives your finance team time to make the necessary adjustments before financial statements are due.

Here’s what to review now and how to prepare for GAAP reporting.

What is GAAP accounting?

Generally Accepted Accounting Principles (GAAP) govern how financial information is recognized, measured, presented, and disclosed in U.S. financial statements. The Financial Accounting Standards Board (FASB) establishes these standards for nongovernmental entities. Its Accounting Standards Codification is the authoritative source of U.S. GAAP.

Consistently following these standards gives lenders, investors, and other users a common basis for comparing financial results from one reporting period to another.

When do private companies need GAAP financial statements?

Whether a private company needs GAAP financial statements depends on its agreements, reporting obligations, and who will use the statements. A lender, investor, or potential buyer may require them for a specific purpose. The following are some common situations:

• Financing: A lender may specify the accounting basis, how often statements are required, and whether a compilation, review, or audit is needed.
• Outside investment: Investors may request financial statements prepared under an agreed reporting framework before committing capital.
• A potential sale: Prospective buyers may ask for GAAP financial statements or adjustments during due diligence as they evaluate the business.

Before making changes, confirm the reporting framework the requesting party expects and whether a compilation, review, or audit is also required. GAAP reporting and these engagement requirements are separate. An audit is an independent assurance engagement in which a CPA expresses an opinion on the financial statements.

Is accrual accounting the same as GAAP accounting?

No. Accrual accounting is a foundation of GAAP reporting, but maintaining accrual-based books does not mean your financial statements conform to GAAP. Recording receivables, payables, and other transactions in the appropriate period does not satisfy all GAAP requirements.

GAAP reporting may also require your finance team to address:

• Revenue recognition and contract liabilities
• Accounting estimates and asset valuation
• Leases and other obligations
• Financial statement presentation and disclosures

For example, a company may record invoices and bills in the appropriate periods but omit a material lease obligation or recognize revenue using a schedule that does not reflect the appropriate accounting treatment.

Four accounting areas to review as your business grows

Growth often brings new types of transactions and more multifaceted financial arrangements. Under GAAP, some may require a closer accounting review. Here are four areas to pay attention to.

Revenue recognition as customer contracts become more complex

Deposits, subscriptions, bundled products or services, and contract changes can make the timing of revenue recognition less straightforward. An invoice or customer payment does not necessarily determine when revenue is recognized. Under GAAP, the timing depends on when or as the applicable performance obligations are satisfied.

Finance teams should keep documentation that supports the accounting treatment, such as:

• Signed customer agreements
• Contract modifications
• Evidence of delivery or performance
• Documented accounting conclusions

Expense cutoff, accruals, and prepaid costs

Higher transaction volume increases the risk of expenses being recorded in the wrong reporting period. Supplier invoices may arrive after the close, employees may have earned compensation that has not been paid, and advance payments may cover future periods.

At period-end, finance teams need to capture obligations that have already been incurred and allocate qualifying prepaid costs to the appropriate periods. An approved purchase order alone does not establish an expense or liability.

Asset balances and accounting estimates

A reconciled balance may still require an accounting adjustment. Depending on the asset, finance teams may need to review:

• Receivables: Whether expected credit losses are appropriately reflected
• Inventory: Whether the reported value requires adjustment
• Capital expenditures: Whether costs should be capitalized or expensed
• Fixed assets: Whether capitalization and depreciation assumptions remain appropriate

Leases, debt terms, and disclosure requirements

New leases, financing, and amended agreements involve more than recording payments under GAAP. Finance teams should review the accounting treatment, debt classification, covenants, and relevant disclosures.

Significant agreements should be reviewed with an accounting advisor to determine the appropriate treatment. Acquisitions and consolidation may call for specialist guidance since there may be additional reporting requirements.

How can a growing business prepare for GAAP reporting?

Preparing for GAAP reporting starts with knowing what’s expected of your business. Here’s where to start.

Confirm the reporting scope and deadline

The first thing to do before preparing your financial statements is to confirm the following:

• Who will use them
• Which reporting periods and business entities are included
• Whether comparative financial information is required
• Whether a compilation, review, audit, or other engagement is requested
• When the statements are due

Understanding the scope and deadline lets your finance team know what needs to be prepared and can help determine if there’s a need for outside accounting or assurance support. For example, a request covering multiple entities and two comparative periods may require additional records, reconciliations, and review compared with reporting for a single entity and period.

Document policies and prioritize material gaps

Focus first on significant transactions and balances rather than treating every accounting difference the same. Prioritize gaps that could have a material effect on the financial statements. For each one, document the accounting policy, any required adjustments, who owns it, and its review status.

Build supporting schedules into the monthly close

Recurring GAAP adjustments should not have to be rebuilt from scratch each reporting period. Add supporting schedules for significant balances to the regular close process. Depending on the business, these may cover deferred revenue, accrued expenses, prepaid costs, and fixed assets.

Reconcile each schedule to the general ledger and retain the supporting documentation. Assign preparation and review responsibilities, and track unresolved items through completion.

If the same adjustment appears every month or quarter, look at the process behind it. The documentation, workflow, or accounting treatment may warrant attention.

Review the complete financial statement package

A profit and loss statement and balance sheet may not represent the complete financial statement package required under GAAP. Work with your accountant to determine the statements, comparative periods, and notes required for the reporting request.

Before issuing the financial statements, review the presentation, significant estimates, disclosures, and consistency throughout the package.

Build more consistent GAAP accounting processes with QuickBooks Online Advanced

Preparing for GAAP reporting often means turning accounting decisions into processes your team can follow each reporting period. QuickBooks Online Advanced can support that work with:

• Revenue recognition: Set up schedules to automatically track and recognize revenue based on the treatment your finance team determines.
• Fixed asset management: Maintain fixed asset records and automate future depreciation entries based on configured asset information.
• Permissions and approvals: Set custom roles to control access and use approval workflows to add review points to supported transaction workflows.
• Reporting: Build custom reports and use advanced financial reporting tools to review the information your team needs for analysis.

These capabilities can reduce manual work and make established accounting processes easier to repeat. Your finance team and accounting advisors remain responsible for:

• Determining the appropriate GAAP treatment
• Configuring the software to reflect that treatment
• Reviewing estimates, adjustments, and disclosures
• Confirming that the complete financial statements meet applicable requirements

With established accounting processes in place, QuickBooks Online Advanced can help your team manage increasing GAAP reporting demands with greater consistency and visibility.

GAAP accounting FAQs

Does GAAP reporting require an audit?

No. GAAP defines the financial reporting framework, while an audit provides a separate level of assurance. Whether an audit is required depends on applicable agreements or other reporting requirements.

Can tax reporting differ from GAAP financial reporting?

Yes. Tax rules and GAAP can recognize income, expenses, and other items at different times or in different amounts. Maintain appropriate reconciliations so your team can account for those differences.

Can private companies use accounting alternatives within GAAP?

Eligible private companies may be able to use certain accounting alternatives available under U.S. GAAP. Work with your accounting advisor to confirm eligibility and consider how an alternative may affect the intended users of the financial statements.