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Basic Accounting Concepts

Paper type: Essay
Pages: 4 (929 words)
Categories: Accounting
Downloads: 10
Views: 2

Generally accepted accounting principles allows the accounting profession to follow a recognized organization of objectives, to provide a structure for solving problems, to improve the understanding of financial statement and confidence in financial reporting, and to develop contrast among companies financial statements that can be generally accepted and universally practiced, “generally accepted” means that a reliable accounting organization has developed a standard of reporting that has been accepted because of the universal application (pg. , Kieso, Weygandt, & Warfield, 2007). There are four organizations that are evolved in the development on the GAAP in the United States and offer significant authoritative support; Securities and Exchange Commission (SEC), American Institute of Certified Public Accountants (AICPA), the Financial Accounting Standards Board (FASB), and the Government Accounting Standards Board (GASB) (pg.

6, Kieso, Weygandt, & Warfield, 2007). . Securities and Exchange Commission (SEC) develops and standardizes financial information submitted to shareholders.

The SEC encouraged the development of standards in the private sector thus accounting standards have been developed in the private sector by either the American Institute of Certified Public Accountants (AICPA), or the Financial Accounting Standards Board (FASB), and the Government Accounting Standards Board (GASB) (pg. 6, Kieso, Weygandt, & Warfield, 2007). The American Institute of Certified Public Accountants (AICPA) is the national professional organization for practicing Accounting.

With influence from the SEC the AICPA appointed the Committee on Accounting Procedure (CAP) in 1939 which issued 51 accounting research bulletins dealing with accounting problems during a twenty year spam. The CAP failed to provide the needed structure of accounting principles, for this reason the AICPA created the Accounting Principles Board (APB). The main purpose of the APB was to develop an overall intangible structure to assist in the resolution of problems.

The Wheat Committee charged the APB with being ineffectiveness and presented their findings to the AICPA which in turn caused the downfall of the APB and the creation of a new standard-setting structure composed of three organizations; the Financial Accounting Foundation (FAF), the Financial Accounting Standards Board (FASB) and the Financial Accounting Standards Advisory Council (FASAC) with the FASB being the major organization (pg. 7, Kieso, Weygandt, & Warfield, 2007).

The FASB mission is to establish and improve standards of financial accounting and reporting for the guidance and education of the public while relying on two basic premises, that they should be responsive to the needs and viewpoints of the economic community, and that they should operate in full view of the public through a due process system. The FASB issues three types of pronouncements; Standards, Interpretations, and staff positions, Financial Accounting concepts, and Emerging Issues Task Force Statements (pg. , Kieso, Weygandt, & Warfield, 2007). Government financial statements are not comparable with financial reports prepared by private business organizations, for this reason the Governmental Accounting Standards Board (GASB) was created. The operation of the GASB is similar to that of the FABS being that it has an advisory council with its own technical staff and task force (pg. 10, Kieso, Weygandt, & Warfield, 2007) .

The FASB has been working on The Hierarchy of Generally Accepted Accounting Principles, this standard identifies the basis of accounting principles and the structure for the principles to be used in the preparation of financial statements, and have categorizes the major sources of the GAAP as follows; FASB Standards, Interpretation, and Staff positions, APB opinions, and AICPA Accounting Research Bulletins. On occasions transactions occur that these documents do not cover, in that instance companies must use other authoritative literature (Kieso, Weygandt, & Warfield, 2007) .

The FASB has identified qualitative characteristics of accounting information that differentiates valuable information from insignificant information for the decision making process. Decision Makers use a variety of information whether it is given, or knowledge based, however, for this information to be useful the decision maker must understand the quality of the information that they possess. There are four qualities that makes accounting information useful in decision making; relevance, reliability, comparability, and consistency (pg. 2, Kieso, Weygandt, & Warfield, 2007) . Relevance and reliability are the two main qualities that make accounting information useful for decision making. Relevant information must have a predictive, and feedback value, reliable information must be verifiable, and free of error and bias.

Comparability and consistency are the secondary qualities, comparable information enables users to identify similarities and differences in economics events between companies, and consistent information is a company applying the same accounting standards from period to period (pg. 2-33, Kieso, Weygandt, & Warfield, 2007). Accrual basis accounting is the method when a company’s transactions are recorded in the periods in which they occur, they recognize revenues when earned (the revenue recognition principle) rather than when they receive cash. Cash basis accounting is when a company records revenues only when cash is received, the cash basis of accounting is prohibited under the GAAP (PG. 160, KIMMEL, WEYGANDT, KIESO, 2007). There are three types of business structures a sole proprietorship, a partnership, and a corporation.

A sole proprietorship is a business owned by one person, it is the simplest structure to establish and gives one person total control over the business. A partnership is a business owned by two or more people. Partnerships are often formed because one individual does not have enough economic resources to initiate or expand the business. A corporation is made of investors who in turn for investing into a business receive shares of stock therefore making it easier for corporations to receive funds. Many businesses start as sole proprietorships or partnership, and eventually incorporate (PG. 5, KIMMEL, WEYGANDT, & KIESO, 2007).

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Basic Accounting Concepts. (2020, Jun 01). Retrieved from https://studymoose.com/basic-accounting-concepts-new-essay

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