The poet was very much moved by the sight of the daffodils. So, by comparing the dancing of the daffodils to that of the waves beside them, he merely wanted to express the joy the flowers brought to his mind. 

The waves beside them danced; but they
Out-did the sparkling waves in glee:
A poet could not but be gay,
In such a jocund company:

The waves in the lake were sparkling in joy, but the daffodils seemed to have exceeded the waves in their glee. This is how the poet emphasizes the joyfulness of the sight.