April 17, 2014
Instructor Name Accounting Principles
It is safe to say that the first known record of general accounting concepts begin in the early 1900’s, following the stock market crash, resulting in the Great Depression. The need for more productive accounting measures was evident and the government realized the need to improve the regulations of financial institutions and the stock market. The government later developed the Securities and Exchange Commission (SEC). This organization was responsible for developing and standardizing general accounting procedures and presenting it to stockholders, private organizations and public organizations Kieso, Weygandt, & Warfield, 2007).
The American Institute of Certified Public Accountants (AICPA) and The Financial Accounting Standards Board (FASB) are two organizations established to assist the Securities and Exchange Commission by providing guidance and aid with enforcing accounting practices The Securities and Exchange Commission depends on the FASB for standard development but still exercises their own practices should they decide to reject any standards developed by the FASB Kieso, Weygandt, & Warfield, 2007).
Effective Accounting Information
Accurate and consistent accounting practices is vital to any business. There are qualities that the information needs to meet. There are two primary qualities that are Relevance and Reliability. In order for information to be relevant should make a difference in a decision. If that same information does not have any effect on that decision it is irrelevant and not useful. The other primary quality is reliability of the information. Reliable information must be verifiable, be a faithful representation, and be free from error or bias at a reasonable level. Those receiving the information do not have the time to verify that same information for correctness.
There are secondary qualities that the information must meet, Comparability and Consistency. Comparability can be defined as, similarly information that is measured and reported similarly by different companies. Consistency be defined as a system or pattern a company uses, the same accounting methods from period to period that shows the company is using the same accounting standards (Kieso, Weygandt, & Warfield, 2007).
Accrual versus Cash-Based Accounting
The accrual-based accounting practice and the cash-based accounting practice may sound similar but they are very different. With Accrual-based accounting, financial transactions that could potentially change the company’s financial statements are documented or recorded when the transaction occurs. When revenues are recognized when they are earned this is called the revenue recognition principle. When expenses are recognized when they occur this is called the matching principle. Accrual-based accounting follows the revenue recognition and matching