Why Do Companies Need to Follow GAAP? (2024)

Why Do Companies Need to Follow GAAP? (1)

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Shawna Johnson

Certified Public Accountant with expertise in financial analysis | Familiar with IFRS, US GAAP and other accounting standards

Published Nov 27, 2023

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The purpose of GAAP (which stands for Generally Accepted Accounting Principles) is to make sure that all companies use the same clear and fair way of keeping track of their money. This helps business leaders see how well a company is doing, compare it with other months, and do things like getting money from investors or selling shares on the stock market. It's especially important for big companies that have to show their financial statements to the public.

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GAAP is a set of rules that businesses can follow when they are reporting their financial information. It helps make sure everything is done the same way and makes it easier to compare different companies. Following GAAP isn't required for all businesses, but it's recommended if you want to go public or raise money in the future. If your company releases its financial statements publicly or trades on the stock market, then you have to follow GAAP by law and get audits from independent auditors every year. But if your business doesn't have outside investors, following GAAP is optional.

GAAP helps make financial statements easier to compare and understand, but it doesn't guarantee they're perfect. The SEC wants the U.S. to switch to IFRS like many other countries, but it's taking a long time.

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