ACC 537

Basic Accounting Concepts
Sources of GAAP There are four bodies who take part in the creation of Generally Accepted Accounting Principles. The first of which is the Securities and Exchange Commission (SEC). Companies that go public must file financial statements with the SEC. The SEC creates a standard of financial statements that the companies must file. The SEC works with the private sector as well by encouraging resolving reporting problems and may also reject standard proposals. The SEC may also issue deficiency letters and stop orders when they believe a company’s financial statements contain errors. The second group responsible for developing GAAP is the American Institute of Certified Public Accountants (AICPA). The AICPA has introduced boards and committees that help develop GAAP. The Committee on Accounting Procedure (CAP) was founded by the AICPA and issued Accounting Research Bulletins that dealt with accounting issues on a problem by problem basis. CAP was eventually dissolved, and the Accounting Principles Board was developed. Their main goal was to create a conceptual framework. It issued APB opinions and was also later dissolved. The third responsible party in GAAP creation is the Financial Accounting Standards Board (FASB). “Its mission is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, which includes issuers, auditors, and users of financial information (Kieso, Waygandt, and Warfield 8).” In the development of standards, the FASB relies on a system of “due process” whereas all have the chance to make their views known. The FASB must have the vote of four of its seven members in order to pass a Statement. The FASB issues the three following items: 1. Standards, Interpretations and Staff Positions. 2. Financial Accounting Concepts 3. Emerging Issues Task Force Statements The fourth source of GAAP is Governmental Accounting Standards Board (GASB).
This Board was created to deal with the unique qualities of financial statements issued by governments. Its basic makeup is similar to that of the FASB, including an advisory board.
Effective Accounting Information One characteristic of effective accounting information is understandability. This means the statement should be prepared in a manner that a user with reasonable knowledge will understand them. A primary characteristic is relevance. This means the information is useful in making decisions. A second primary characteristic is reliability. This simply means the statements are without error. A secondary quality is comparability. This is so that statements from different companies can be compared. Another secondary quality is consistency. The statements must be consistent across accounting periods.
Accrual v. Cash Basis Accounting A company utilizes the cash basis accounting when cash collection at time of sale can be uncertain. The company recognizes revenue upon the collection of cash and expenses at the time of payment. One example of this is the installment record where the company recognizes revenue at different stage of production. The accrual basis of accounting recognized expenses at the time they occur and revenues when they are earned. This is the most common accounting method used by companies.