US Accounting Standards for Small Businesses
Encompassing all policies and regulations, the US accounting standards has been improving financial accounting practices of firms and businesses in the US to foster transparency and compliance.
Businesses, no matter the size, are required to organize financial statements and often, this takes time and money. Each country around the world has developed their own standards, but the overall premise remains—that financial statements should be reported accurately and fairly. It should contain measurement of economic activity, presentation and preparation of the company’s financial statements.
Brief background of US accounting standards
The American Institute of Certified Public Accountants (AICPA) developed the first standards that were part of the Securities Act of 1933, which was eventually transferred to the Financial Accounting Standards board (FASB).
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US GAAP accounting standards
Each organization conforms to a different set of small business accounting standards. For most SMEs, it is usually the Generally Accepted Accounting Principles (GAAP) set by FASB.
GAAP covers revenue recognition, balance sheet item classification and outstanding share measurements; but the new framework is intended to provide a simpler way to create financial statements for small businesses. It gives the management and other parties such as banks to better describe the company’s finances.
There are also 10 tenets that support the mission and vision of GAAP.
- Principle of Regularity
- Principle of Consistency
- Principle of Sincerity
- Principle of Permanence of Methods
- Principle of Non-Compensation
- Principle of Prudence
- Principle of Continuity
- Principle of Periodicity
- Principle of Materiality / Good Faith
- Principle of Utmost Good Faith
In 2013, the AICPA announced a new financial reporting framework for small and midsize entities. The guidelines mentioned are an alternative to the GAAP.
The new framework will only utilize historical cost as basis for valuing assets and liabilities and not the current market value. It will not include off-balance-sheet entities, derivatives, or hedging. However, AICPA is not requiring small companies to adopt it.
One of the drastic changes that will be imposed in the new guideline is in accounting for goodwill which happens when a company buys another one for more than its value. GAAP will now require periodic reviews to check whether the goodwill is “impaired” or otherwise. The data needs to be archived because the acquired operation might have lost its value.
According to the FASB, these standards are important to a well-organized and functioning financial and managerial system to make economic decisions regarding the allocations of the resources that rely heavily on credible, concise and understandable financial information.
Related: Facts Behind Financial Statement Analysis And Valuation
Whether you’re an enterprise level or a startup, complying with the US accounting standards gives you a solid foundation in producing comprehensive financial statements and improving your accounting practices. In addition, abiding by the GAAP gives you a more attractive entity to investors since it reflects your smooth management of revenue and cash flow.
This post was first published 5 August 2014 and edited 15 December 2020.
Edited by: Maria Katrina dela Cruz