Accounting involves a process of collecting, recording, and reporting a business’s economic activities to users. It is often called the language of business because it uses a unique vocabulary to communicate information to decision makers.
GAAP
GAAP is a set of rules for standardized financial reporting that help ensure accuracy and transparency. Organizations like publicly traded companies and government agencies must follow GAAP, which adapts to economic changes.
GAAP stands for Generally Accepted Accounting Principles.
GAAP guidelines focus on four main rules, like consistency, comparability, reliability and transparency, to ensure accurate reports. GAAP is generally followed in the United States of America.
Consistency: GAAP ensures that bookkeepers maintain consistency in their record-keeping practices, helping businesses easily compare financial statements across different periods.
Transparency: By adhering to GAAP, bookkeepers provide transparent and accurate financial information, allowing stakeholders to make informed decisions.
Comparability: GAAP allows for the comparison of financial statements between different companies, as it creates a standardized method for bookkeeping and accounting.
Reliability: GAAP compliance ensures that the financial records prepared by bookkeepers are reliable and trustworthy, minimizing the risk of errors and misrepresentations.
Organizations subject to GAAP requirements must prepare their balance sheets, income statements, cash flow statements, and statements of shareholder’s equity using GAAP principles.
Balance sheet – A snapshot of a company’s financial position at a specific point in time, listing assets, liabilities, and shareholders’ equity.
Income Statement – A report that shows a company’s revenue, expenses, and net income over a specific period.
Cash flow statement – A record of cash inflows and outflows, categorized into operating, investing, and financing activities, over a specified period.
Statements of shareholder’s equity – A summary of changes in stockholders’ equity, including changes due to net income, dividends, and stock issuances or repurchases, over a certain period.
In the United States, accountants follow the GAAP for compiling financial statements. Outside the United States, many countries follow the International Financial Reporting Standards (IFRS) for maintaining and compiling financial statements.
Key Differences between GAAP and IFRS:
| Feature | GAAP | IFRS |
| Full form | Generally Accepted Accounting Principles | International Financial Reporting Standards |
| Applicability | United States | Over 144 countries worldwide |
| Governing body | Financial Accounting Standards Board (FASB) | International Accounting Standards (IAS) |
| Inventory Recognition | LIFO, FIFO, and weighted average methods are allowed. | The FIFO and weighted average methods are allowed. |
Principles in US Accounting
- Matching Principle:
Expenses are recognized in the same period as the revenues they helped generate. This principle ensures a company’s costs and the income they produce are matched to give a true view of profitability in a specific period.
- Revenue Recognition Principle:
Revenue is recorded when it is earned and realizable, not necessarily when cash is received. This means a business should recognize income in the period it is earned, regardless of when the payment is made.
- Historical Cost Principle:
Assets are recorded at their original purchase price. The principle is that assets should be reported at the amount paid for them at the time of acquisition, rather than their current market value.
- Objectivity Principle:
Financial records must be based on objective, verifiable evidence. This means that financial statements should be based on facts and not on opinions or subjective judgments to maintain accuracy and reliability.
- Full Disclosure Principle:
All information that could affect a user’s understanding of a company’s financial position must be included in the financial statements or their accompanying notes. This ensures stakeholders have a complete picture of the company’s financial health.
US Taxes Overview
Taxes are money that people and businesses must pay to the U.S. government. This money helps fund public services like roads, schools, healthcare, the military, etc.
Types of US Taxes
1. Federal Income Tax
Paid to the U.S. federal government. The federal income tax is determined by various factors such as salary, business profit, and interest.
2. State Income Tax
Not all states charge this (e.g., Texas, Florida, and Nevada have no state income tax). Paid to the state government.
3. Payroll Taxes
Taken from your paycheck. Used for Social Security and Medicare.
4. Sales Tax
Added when you buy things (varies by state).
5. Business Tax
Companies Must Pay Taxes on Their Profits.
How US Taxes Are Calculated
1. Progressive Tax System
The more you earn, the higher your tax rate.
2. Tax Brackets
Income is divided into brackets. Each bracket is taxed at a different rate.
3. Deductions
Amounts subtracted from your income to reduce your tax bill.
Examples: mortgage interest, student loan interest, and charity donations.
4. Credits
Reduce your tax bill directly. Examples: Child tax credit and education credit
Important US Tax Forms
For Businesses
| Form | Purpose |
| Form 1120 | Corporation tax return |
| Form 1065 | Partnership tax return |
| Schedule C | Used by small businesses/sole proprietors |
| EIN | Business tax ID (like a business SSN) |
For Individuals
| Form | Purpose |
| Form 1040 | Main tax return form filed by individuals |
| W2 | Shows employee income and tax withheld |
| 1099 | Shows freelance/contract income |
| W4 | It tells your employer how much tax to deduct |
Benefits of Paying Taxes:
- Helps you qualify for loans
- Banks trust people who file taxes.
- Possible refunds
- If you paid more tax than needed → IRS refunds your money.
- Access to government services
- Such as Social Security, Medicare, public schools, etc.
- Legal Compliance
- Avoid penalties, lawsuits and IRS problems.
- Proper tax filing improves business trust and investment opportunities.
Who Must File Taxes?
Individuals must file if:
They earned income.
They are self-employed and earned $400+.
They worked for a company and have a W-2.
Businesses must file:
No matter how much they earned.
When to File?
Tax season:
January → April 15 (usually)
Extensions can move this to October.
Software’s – Turbo Tax
H&R Block
Drake Tax
