In theory, generally accepted accounting principles should be applied equally to both public and private companies. However, the increasing complexity of GAAP is only relevant to public companies. Small and medium enterprises mainly apply small GAAP. They are designed to provide a cost-effective way that allows the owners of the small and medium business enterprises to provide effective and relevant financial information to users of financial statements. Thus, the fist distinction is that big GAAP is applied in preparing financial statements of public traded companies while private companies apply small GAAP (CCH, 2015).
The small GAAP are a simplification of the big GAAP. The small GAAPs are made for small companies because the company’s business is not complex hence a simplified form of GAAPs should be used in preparing the financial statements. These simplifications help SMEs to avoid excessive details in reporting simple and straight forward transactions (Merkline, 2016).
Small GAAP applies to small and medium enterprises because the main users of their financial statements are the financial institution and lenders in general. These users insist on having the SMEs financial statement prepared in cash based accounting practices. Thus, small GAAP gives SMEs some flexibility that is disallowed in the preparation of public companies financial statements (Merkline, 2016).
Small GAAP is a subset of the big GAAP. It is formed by modification of big GAAP and provision of various exceptions. This modifications and exceptions are made to simplify accounting for private companies. It allows them to circumvent provisions of GAAP that are irrelevant to the small nature and simplicity of private companies (Merkline, 2016).
Conclusion
The major difference between big GAAP and small GAAP is based on the fact that public companies use the former. The small GAAP allows modification and exclusion of some provisions found in big GAAP. Thus, small GAAP is a subset of the big GAAP.
References
Merkline, J. E. (2016). BIG GAAP VS. LITTLE GAAP VS. NO GAAP. Retrieved April 19,
2016, from http://bmfcpa.com/client_advisor/frf_for_smes_0713
CCH. (2015). TOP ACCOUNTING ISSUES FOR 2016. Chicago, Illinois.
