ACCOUNTING PRINCIPLES

Accounting Principles

Accounting Principles

Accountants use generally accepted accounting principles (GAAP) to guide them in recording and reporting financial information. GAAP comprises a broad set of principles that have been developed by the accounting profession and the Securities and Exchange Commission (SEC). Two laws, the Securities Act of 1933 and the Securities Exchange Act of 1934, give the SEC authority to establish reporting and disclosure requirements. However, the SEC usually operates in an oversight capacity, allowing the FASB and the Governmental Accounting Standards Board (GASB) to establish these requirements [1]. The GASB develops accounting standards for state and local governments.

Accounting is called the language of business that which communicates the financial condition and performance of a business to interested users, also referred to as stakeholders. In order to become effective in carrying out the accounting procedure, as well as in communicating the financial information of the business, there is a widely accepted set of rules, concepts and principles that governs the application of the accounting procedures, and it is referred to as the Generally Accepted Accounting Principles or GAAP.

The current set of principles that accountants use rests upon some underlying assumptions. The basic assumptions and principles presented on the next several pages are considered GAAP and apply to most financial statements. In addition to these concepts, there are other, more technical standards accountants must follow when preparing financial statements. Some of these are discussed later in this book, but other are left for more advanced study.

Accounting principles are also referred to as generally accepted accounting principles or GAAP. Accounting principles range from general guidelines to very detailed rules established by the Financial Accounting Standards Board (FASB).

The general guidelines, or basic accounting principles, include the cost principle, matching principle, full disclosure principle, going concern assumption, economic entity assumption, monetary unit assumption, materiality, and industry peculiarities or practices. The specific rules issued by the FASB include more than 150 statements of financial accounting standards and interpretations. (These are available at www.fasb.org.) Often, industries that are regulated by government agencies will have unique reporting standards or requirements. Many of the rules established by the FASB's predecessors continue to be part of GAAP[2].

Financial statements that are distributed outside of a company are to be prepared in accordance with generally accepted accounting principles. Corporations whose stock is publicly traded must have their financial statements audited by independent certified public accountants. These CPAs give assurance that the financial statements were prepared in accordance with generally accepted accounting principles.

The Securities and Exchange Commission (SEC), a U.S. government agency, has the ultimate authority over the reporting requirements of publicly traded corporations. However, the SEC allows the FASB to develop accounting rules or standards.

Economic entity assumption. Financial records must be separately maintained for each economic entity. Economic entities include businesses, governments, school districts, churches, and other social organizations. Although accounting information from many different entities may be combined for financial reporting purposes, every economic event must be associated with and recorded by a specific ...