A recent study found that mostbusinesses, whether publicly traded orprivately held, follow U.S. Generally Accepted Accounting Principles(GAAP)—and not just becauseit’srequired by the U.S. Securities and Exchange Commission orlenders.Manybusinessowners andfinance leadersactually preferGAAP over other reporting frameworks.Butit’snot right for every situation.
Over time, your businessmay outgrowits existing accounting method.Here’swhat you should knowtohelpensure your financial reporting aligns with your business goals and stakeholder expectations.
Survey says …
Accounting Basis and Verification: Survey Evidence from U.S. Private Firmsisthe first large-scale modern effort to address the gap between how private businesses and public companies report their financial results.After surveying more than 500 CFOs at private businesses, itturns out that the differencesaren’tas significant as you might expect.The results were discussed duringaMarch 2026meeting of thePrivate Company Council, whichadvisesthe Financial Accounting Standards Board on financial reporting standards and concerns for small businesses.
Notably, themulti-universitystudy found thatmanyprivate companies followGAAP, though some use carve-outs for certain complex rules, such as the lease guidance.Roughlytwo-thirdsof respondents (68%) strictly follow GAAP, and one-quarterfollow GAAP with some exceptions.
The study also found that less than half of private businesses (49%) follow GAAP exclusively, andmany organizations usemultiplereporting methods simultaneously. For instance, some follow GAAP for external financial reporting purposes, then use tax- or cash-basisreports internally. This approach can give management moretimelyinsight, becauseGAAP financials may require adjustments and footnote disclosures that take time to prepare. Similarly, some respondents thatoperateglobally follow both GAAP and the International Financial Reporting Standards(IFRS).
Benefits of using GAAP
Lendersofteninfluencea private business’s decision to prepare GAAP financials. Buteven whenGAAP isn’trequired under abusiness’sloan covenants,managementmayvoluntarily follow itforoperational and strategicreasons.In fact, the survey found that 64% of respondents without bank financing still use GAAP.
Besides improved access to bank financing andenhanced loan terms,the surveyidentifiedthe followingtopfivewaysGAAP financialshelpprivatebusinesseswork withexternalstakeholders:
- Aiding in preparing for a business sale or initial public offering,
- Improvingaccess to equity capital and enhancingequity investmentterms,
- Reducinglitigation risks,
- Enhancingterms with suppliers, and
- Increasingsales with customers.
From aninternalperspective, GAAPfinancials help managersprepare budgets and forecasts;assessprofitability by product, businesssegmentor customer;gauge employeeand teamperformance;allocateresources; and benchmark results against competitors.
GAAP typicallyrequiresmore resources than other accounting frameworks. Butit’soften perceived as the “gold standard” in financial reporting.
Financial reporting options
You might be wondering: How do the financial reporting frameworks compare?Below isanoverview ofcommon accounting methods:
Accrualmethod.Businesses that issueGAAPfinancial statements usetheaccrualmethod ofaccounting.Under accrual-basis accounting, revenue is recognized when earned (regardless of whencash isreceived), and expenses are recognized when incurred (not necessarily whenbillsarepaid). Thismethodologymatches revenue to the corresponding expenses in the proper period.Soit’sgenerallyconsideredthe most reliablereportingmethod for long-term financial planning and decision-making, particularly for businesses with complex operations or external reporting needs.
Cashmethod.Under cash-basis accounting, transactions are recordedonly when money changes hands. For example, if you buy a new computer on credit,you’drecord it as an expensewhenyou pay for it.Although simple, the cashmethodcan make it difficultto get acompletepicture of financialperformance.Telltale signs that a business is using cash-basis accounting can be found on the balance sheet: Itwon’tshow any accrual-basis items, such as accounts receivable, prepaid assets, accounts payable or deferred expenses.
It’scommon forstartups and sole proprietorshipsto use the cashmethodof accountingbecauseit’ssimple and provides an immediate picture of available funds.But it maynot provide enough information to manage a larger, more complicatedbusiness.
Taxmethod.Another financial reportingoptionis to use the same accounting method for book and tax purposes. Under tax-basis accounting,financial statements are prepared using tax accounting rules rather than GAAP. As a result, income and expenses may be recognized differently than under accrual-basisfinancial reporting.Contrary to GAAP, tax lawsgenerallytendto favor accelerated gross income recognition anddon’tallow taxpayers to prematurely deduct expenses until the amounts areknownand other deductibility requirements have been met.Tax-basis accountingcan be beneficial if your businessdoesn’thave complex financialaffairsand youdon’tneed up-to-datefinancialinformation.
Additionally,your business may be eligible to use the cash method of accounting for tax purposesif itsaverage annual gross receiptswere belowan inflation-adjusted thresholdfor the prior three-year period.For2026, the gross-receiptthreshold is $32 million.This canallow smaller entities tosimplifyrecordkeeping and defer taxes.
Additionally, businesses with global operations may issue financial statements that conform to IFRS,another accrual-basis financial reporting framework that’ssimilar toGAAP.The primary difference is that GAAP tends to be prescriptive and rules-based,whereasIFRSisgenerallymoresubjective andprinciples-based. There are also subtle differences in the accounting methods that are allowed under each standard. For example, the last-in, first-out inventory (LIFO) method is common in the United States, butit’snotpermittedunder IFRS.
Nomethodfitsallbusinesses
U.S. public companiesare generally required toissue audited GAAP financial statements(currently on a quarterly basis). However,private companiesmay usealternative methods,unlesstheir lenders require GAAP reporting.Theoptimalfinancial reporting approachdepends on yourbusiness’ssize,resources,planned internal and external uses, and long-term goals.The methodyou’veused in the past may not beappropriate foryour current situation. Contactyour accountant to discuss your options.
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