Small non-public entities prepare financial statements for a variety of reasons. Usually, it is done at the request of third parties (banks, potential investors or other interested parties) or simply for internal monitoring purposes. The basis of accounting that an entity uses to prepare its financial statements generally is determined by the needs of the users.
A large number of companies, including public entities (SEC registered), prepare financial statements in accordance with Generally Accepted Accounting Principles (GAAP). GAAP basis statements require that entities comply with a large amount of accounting rules and standards resulting in management time ensuring compliance. When these entities consider the cost benefit of such compliance compared to the needs of the users, they have the option to prepare their financial statements on another basis, commonly referred to as OCBOA (Other Comprehensive Basis of Accounting). Typical examples of OCBOA include Cash Basis, Modified Cash Basis, Tax Basis and Regulatory Basis of accounting.
See our next post, as we discuss the differences between the cash and modified cash basis of accounting for non-profit entities.
