Basic Accounting Concepts and Business Structures
The major sources of Generally Accepted Accounting Principles (GAAP) are: FASB Standards, Interpretations, and Staff Positions; APB Opinions and AICPA Accounting Research Bulletins. The hierarchy of GAAP provides guidance in preparing financial statements and is divided into four categories. Category A represents the major sources of GAAP, and Category D the least authoritative. Companies should always follow the higher category when specific accounting transactions occur that the major sources of GAAP do not cover.
The Financial Accounting Standards Board, issues three major types of pronouncements: Standards, Interpretations and ...view middle of the document...
Understandability is the quality of information that informed users will make decisions by. Relevance and reliability are the two primary qualities that make accounting information useful for decision making (Kieso, 2007). Information is relevant if it has predictive value. For this information to be relevant, it must be presented on a timely basis. Accounting information is reliable if it is verifiable, a faithful representation and is reasonably free of error and bias. Two secondary qualities that make accounting information useful are comparability and consistency. Comparability allows users to compare results of companies with the same economic events. Consistency demonstrates a company using the same accounting methods to similar events.
An accrual based accounting system records transactions in the periods in which they occur. If this same customer were to use the cash basis of accounting, they would recognize the expenses when paid, and would recognize the revenue when cash was received. The cash basis of accounting is prohibited under GAAP; it violates the revenue recognition principle and the matching principle.
There are three primary forms of business organization: sole proprietorship, partnership or corporation (Kimmel, 2007). Sole proprietorships are owned by one person, partnerships are usually owned by two or more persons, and corporations are owned by stockholders.