October 20, 2014
Basic Accounting Concepts and Business Structures
There are several sources of accounting principles. They are as listed below.
Financial Accounting Standards Board (FASB) - Members are selected by the Financial Accounting Foundation (FAF). The purpose of FASB is to establish and improve the standards of financial accounting and reporting for the guidance and education of the public.
Financial Accounting Standards Advisory Council (FASAC) – helps and consults with the FASB to fix major policy and technical issues.
American Institute of Certified Public Accountants (AICPA) – This is the national professional organization of CPAs. It was a major establisher of the accounting standards that we know today. FASB has taken over this process.
There is a hierarchy to the sources for accounting principles. The highest layer includes FASB standards, interpretations, and staff positions, APB Opinions, and AICPA accounting research bulletins. The second layer is FASB technical bulletins (which are no longer issued), AICPA industry audit and accounting, guides, and AICPA statement of position. The next level is FASB emerging issues task force and AICPA AcSEC practice bulletins. The lowest tier is AICPA accounting interpretations, FASB implementation guides, and widely recognized and prevalent industry practices. When researching to find a solution or support for an accounting decision, the highest level of the hierarchy should be referenced. If a solution or support is not found, then the second tier, then third, and so on should be examined. If there is support in two tiers, one should refer to the answer found in the highest tier. The hierarchy is important because it is a set of standards that every company should operate by and therefore it allows for a more unified structure to accounting practices.
Effective accounting information has several qualities. The information must be understandable for both external and internal users. If the information is not clear it cannot be used in decision making. The first quality of effective information is relevance. The accounting information must be relevant to the decision that the user is trying to make. Relevancy has three sub qualities – predictive value, feedback value, and timeliness. Predictive value helps the user forecast outcomes of the company’s past, present, and future decisions. Feedback value assists with confirming or correcting what those outcomes were. All the information must be presented on a timely basis. The second quality is reliability. Reliability is necessary because most users do not have the time or the ability to verify all the report information. They must be able to trust the reports. Reliability consists of three sub qualities. These are verifiability, representational faithfulness, and an unbiased accuracy. Verifiability means that the findings of the information can and would be obtained if another person were to compile the information. Representational faithfulness means that what the reports say happen is what actually happened. The information must be neutral so that it does not intentionally favor one interested party over another. Cash based accounting is simplified in its concept. Companies