GAAP
The term GAAP refers to what are known as "Generally AcceptedAccounting Principles." According to the WSCPA, there are different typesof GAAP, including a "GAAP for governmental entities, not-for-profitentities, and for profit entities." The organization with primaryresponsibility for issuing GAAP today is the Financial Accounting StandardsBoard while its predecessor was called the Accounting Principles Board.(WSCPA Website, "The World According to GAAP," 2004) In contrast, incometax accounting principles are decided upon based upon the rules of the IRSor the country where the income tax is being reported by the entity. "Publicly held companies and certain regulated companies are requiredby law to use GAAP. Although there is no such requirement for most smallcompanies, practical considerations typically dictate a need to follow GAAPwhen preparing their financial statements." (WSCPA Website, "The WorldAccording to GAAP," 2004) However, for income tax accounting, financialstatements prepared for income tax purposes often differ significantly from In reporting to shareholders, for instance, most large, publicly heldcorporations must use GAAP in terms of reporti
The objectives of measuring income for general financial reporting and forincome tax reporting are different. So if machinery used in production has depreciated, and mustbe replaced, this must be recoded upon the balance sheet as a cost incurredas an operating expense of the business according to GAAP standards. For example, in terms of depreciation,"the Financial Accounting Standards Board has said that the basic purposeof general financial reporting is to provide information that is useful tothose who make economic decisions about business enterprises (ConceptStatement No. However, the amount of income a company reports for tax purposes in anyyear may be smaller than, equal to, or greater than its GAAP-based income. 16 cited on WSCPA Website, "The World According toGAAP," 2004). "Congress and the IRS, on the other hand, attempt to achieve various socialand economic objectives," and do not include depreciation of a business'assets as such an expense.
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