The term GAAP refers to what are known as "Generally Accepted
Accounting Principles." According to the WSCPA, there are different types
of GAAP, including a "GAAP for governmental entities, not-for-profit
entities, and for profit entities." The organization with primary
responsibility for issuing GAAP today is the Financial Accounting Standards
Board while its predecessor was called the Accounting Principles Board.
(WSCPA Website, "The World According to GAAP," 2004) In contrast, income
tax accounting principles are decided upon based upon the rules of the IRS
or the country where the income tax is being reported by the entity.
"Publicly held companies and certain regulated companies are required
by law to use GAAP. Although there is no such requirement for most small
companies, practical considerations typically dictate a need to follow GAAP
when preparing their financial statements." (WSCPA Website, "The World
According to GAAP," 2004) However, for income tax accounting, financial
statements prepared for income tax purposes often differ significantly from
GAAP-based statements.
In reporting to shareholders, for instance, most large, publicly held
corporations must use GAAP in terms of reporting profits and losses.
However, the amount of income a company reports for tax purposes in any
year may be smaller than, equal to, or greater than its GAAP-based income.
The objectives of measuring income for general financial reporting and for
income tax reporting are different. For example, in terms of depreciation,
"the Financial Accounting Standards Board has said that the basic purpose
of general financial reporting is to provide information that is useful to
those who make economic decisions about business enterprises (Concept
Statement No. 1, par. 16 cited on WSCPA Website, "The World According to
GAAP," 2004). So if machinery used in production has depreciated, and must
be replaced, this must...