Updated July 24, 2015
Accounting Standards Chicago Illinois
There are two common accounting standards generally used in small and medium sized businesses.
Definition of ‘Tax Accounting’ or Generally Accepted Tax Principles – GATP
This is the most commonly used accounting standard for small businesses that are not required to be audited. GATP is an accounting method that focuses on taxes rather than the appearance of public financial statements. Tax accounting is governed by the Internal Revenue Code which dictates the specific rules that companies and individuals must follow when preparing their tax returns. Tax principles often differ from Generally Accepted Accounting Principles.
Balance sheet items can be accounted for differently when preparing financial statements. For example, companies can prepare their financial statements implementing various inventory methods internally and can elect to use a different one for tax purposes. These methods can substantially help an entity from a tax planning perspective.
Definition of ‘Generally Accepted Accounting Principles – GAAP’
GAAP are a common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and are one of the commonly accepted ways of recording and reporting accounting information.
GAAP are imposed on companies so that investors have a minimum level of consistency in the financial statements they use when analyzing companies for investment purposes. GAAP cover such things as revenue recognition, balance sheet item classification and outstanding share measurements. Companies are expected to follow GAAP rules when reporting their financial data via financial statements for investment purposes. Even when a company uses GAAP, you still need to scrutinize its financial statements. Just because a company utilizes GAAP, does not mean that it has been audited and the financial statements are reasonable or correct.
The method you choose will depend on the individual needs of the company.
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Chris Amundson is the President of Accounting Solutions Ltd., a full service public accounting firm of Certified Public Accountants and Enrolled Agents handling the bookkeeping, accounting, tax preparation, and audit representation needs of Businesses, Estates, Trusts, and Upper Income Individuals.