Concepts and Business Structures
ACC/537 Financial Accounting
Word Count: 752
Generally Accepted Accounting Principles & Sources
General Accepted Accounting Principles (GAAP) are standards and procedures used by companies to assemble their financial statements. A company’s financial are regulated by these standards in order to provide sound support documentation to end- users. These reports have internal end-users such as management that will make future business decisions based on the current information provided in the reports. While external end-users, such as a bank loan officer, will use the financial reports to determine the credit worthiness of a business. Therefore, in order for these future decisions made by both internal and external end-users, the reports need to provide a precise picture of the current status of the business. These regulations that ensure the financials correctness are governed by several different agencies. (Kieso, Weygant, & Warfield, 2007)
The Securities of Exchange Commission (SEC), American Institution of public accountants (AICPA), the Financial Account Standards Board (FASB), and the Government Accounting Standards Board (GASB) were key attributors in the development of GAAP in the United States. FASB Standards, Interpretations, and Staff Positions; APB Opinions, and AICPA Accounting Research Bulletins have substantial authoritative support and are the hierarchy of the generally accepted accounting principles. (Kieso, Weygant, & Warfield, 2007)
Effective Accounting Information
By using the qualitative characteristics, such as relevance and reliability, a company has the power to make more logically decisions on usefulness. This helps give the decision-makers the understandability necessary to make the appropriate decisions necessary for the company. Relevance helps to create a predictive value using past, present, and future events while feedback value supports the past based on feedback from prior knowledge and aids correct forecasting for annual report. (Kieso, Weygant, & Warfield, 2007)
Reliability can be used if the account information is verifiable, in good faith, and has little to no errors or bias. It is necessary to have reliability due to the limited time that is available to assess the facts. When a company determines what information is needed to produce relevant and reliable financial reports then they are able to conclude which reporting basis is more pertinent to their business. (Kieso, Weygant, & Warfield, 2007)
When a company only records when they receive cash (revenue) and when they pay a debt (expense) by cash, this is considered to be cash basis accounting because no revenue is reported until the cash has changed hands. An example of this would a small dry cleaner. The customer doesn’t pay until the service is provided and the item returned to the owner. This method is not permitted under the generally accepted accounting principles due to the fact that there is no record of revenue when it is earned. This is a direct violation of the revenue recognition principle.
Accrual accounting is more prominently used in the United States.