Financial accounting provides a business with information that will help guide the company. Financial accounting will record the businesses financial transactions. In order to do this, they have to go by standardized guidelines, in which transactions are recorded, summarized and put into a financial report or statement. The standardized guidelines are called generally accepted accounting principles (GAAP), which means that these principles and guidelines have “substantial authoritative support.” This support comes from two standard-setting bodies: the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) (Weygandt, Kimmel & Kieso, 2008), which will be discussed more in details later.
Accounting Guidelines
Accounting requires one to handle many practical financial issues, which requires them to need more detailed guidelines. This is why the FASB is needed, to help implement operating guidelines. These guidelines are classified as assumptions, principles and constraints.
Assumptions provide a foundation for the accounting process.
* Monetary unit assumption states that only transaction data that can be expressed in terms of money be included in the accounting records.
* Economic entity assumption states that the activities of the entity be kept separate and distinct from the activities of the owner and of all other economic entities.
* Time period assumption states that the economic life of a business can be divided into artificial time periods.
* Going concern assumption assumes that the company will continue in operation long enough to carry out its existing objectives.
Principles are rules that specifically show how economic events should be reported during the accounting process.
