Accounting Principles for Public and Private Companies

Accounting Principles for Public and Private Companies

Accounting in public and private companies serves different purposes. Private companies generally have a few owners compared to public companies who have many stakeholders with whom they must share their financial statements. As a result, there are significant differences in the accounting approaches that are used in these types of companies. FASB came up with a useful publication that explains accounting in private companies (Palmon, Peytcheva, & Yezegel, 2011). The publication explains five different differential factors to consider in the analysis and reporting of accounting in private companies. This paper examines two of the differential factors, accounting risks associated with the factors, and their impact on components of the balance sheet.

Differential Factors

Number of Primary Users and Access to Management

One of the differential factors is the number of primary users and their access to management. The number of primary users is an important consideration in accounting for private and public companies because it affects the financing of the business as well as the number of people who assess the financial statements of the company (Hope, Thomas, & Vyas, 2013). Private companies will typically have much smaller numbers of users and people with access to their management. On the other hand, public companies have thousands of shareholders who hold some stake in the company; hence, they have a say in the management of the company.

There are some accounting risks that are associated with the availability of a smaller number of users in a private company. In a private company, there is minimal to no pressure from the owners because it is just a small number of people. This can create an environment where the owners are taking more risks, which can create too much exposure to their finances. The best way to minimize this kind of risk is to create effective corporate governance structures to ensure that decisions are made in a responsible manner.

The number of users in a company affects the balance sheet by affecting the amount of capital that is accessible to the company. Public companies tend to have higher capital because their many stakeholders contribute to the growth of the capital. On the other hand, private companies’ primary method of financing is through lenders and equity investors. This difference creates the negative impact of greater risk exposure. Private companies that are too dependent on creditors can be more exposed financially, which poses risks to their survival.

Ownership and Capital Structure

The ownership and capital structure of private vs. public companies are different. Private companies tend to have no share structure. They may issue stock, but they generally raise capital through equity ownership or lending (Allee, Badertscher, & Yohn, 2020). This capital structure creates significant risk because the owners give up a percentage of the company in exchange for capital. In comparison, public companies have shareholders who finance the company and gain from the company’s profitability. This capital structure affects the balance sheet’s capital by increasing the level of liability. Private companies, especially those who depend on lending, tend to have greater liabilities because of the higher amount of debt needed to finance the company.

References

Allee, K. D., Badertscher, B. A., & Yohn, T. L. (2020). Private versus public, corporate ownership: Implications for future changes in profitability. Journal of Management Accounting Research, 32(2), 27-55.

Hope, O. K., Thomas, W. B., & Vyas, D. (2013). Financial reporting quality of US private and public firms. The Accounting Review, 88(5), 1715-1742.

Palmon, D., Peytcheva, M., & Yezegel, A. (2011). The accounting standards setting process in the US: an examination of the SEC–FASB relationship. Group Decision and Negotiation, 20(2), 165-183.

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In this assignment, you will compare accounting principles for private and public companies. As you may have discovered while reviewing the materials for this course, most of what is learned in accounting courses focuses on public companies, not private ones.

GAAP, as you have also learned from your studies, may be followed by private companies, but it is only required to be used by publicly traded companies. FASB, of course, is designated by the SEC to establish and improve GAAP, so its focus is primarily on publicly traded companies.