Explaining Basic Accounting Concepts and Business Structures

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Explaining Basic Accounting Concepts and Business Structures
Laurie D. Melvin
ACC/537 – Financial Accounting
May 9, 2011
James Neuner, MBA

One of the most important decisions to make when one chooses to start a business is knowing the type of legal organizations to select because the decision affects many aspects of the business. What can be affected are the amount and type of paperwork required, tax payments, possible personal liability one may face, the ability to borrow money, legal obligations, and the business laws that have to be followed. Financial Accounting is a course that introduces basic concepts and methods of corporate financial statements that are most commonly used by internal and external users to students. To explain basic accounting concepts and business structures, this material will identify and describe the sources of generally accepted accounting principles. The source the hierarchy will be identified and the importance of it will be explained. In this material, an accrual-basis accounting system and a cash-basis accounting system will be described as the differences of the two will be explained. Finally, the different types of business structures will be described as each structure features are defined.

Sources of Generally Accepted Accounting Principles
“Generally accepted accounting principles (GAAP) have substantial authoritative support. The AICPA’s [American Institute of Certified Public Accountants] Code of Professional Conduct requires that members prepare financial statements in accordance with GAAP. Specifically, Rule 203 of this Code prohibits a member from expressing an unqualified opinion of financial statements that contain a material departure from generally accepted accounting principles” (Kimmel, Weygandt & Kieso, 2007, p. 12).

Generally accepted accounting principles (GAAP) are an established common set of accepted accounting principles, procedures, and standards made over time by the AICPA, a “national professional organization of practicing Certified Public Accountants (CPAs)”, used as a universal application. Because of the industrial economy growth, its capital markets and after the Great Depression in 1929, the federal government established the Securities and Exchange Commission (SEC) to protect stockholders. However, the SEC found that many non-publicly trades organizations did not fall under its securities laws and jurisdiction and developed two private sectors, AICPA, and the Financial Accounting Standards Board (FASB) to establish and improve accounting standards and principles in the private sector. The FASB’s “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, Weygandt & Warfield, 2007, p. 8).

The FASB is working on a standard that defines the meaning of GAAP called, “The Hierarchy of Generally Accepted Accounting Principles”, to identify accounting principles sources and structure for choosing the financial statements principles that should be used when their preparations – that falls under four categories. The major sources of the GAAP and, most authoritative, are the FASB Standards, Interpretations, and Staff Positions; APB Opinions; and AICPA Accounting Research Bulletins – that falls under Category A of Categories A, B, C, and D with Category A being the highest and first standards to follow. Under Category B are the AICPA Industry Audit and Accounting Guides, AICPA Statements of Position, and the FASB Technical Bulletins – that is no longer used. Category C consist of the FASB Emerging Issues Task Force and AICPA AcSec Practice Bulletins, and under Category D, the least authoritative, are the AICPA Accounting Interpretations, FASB Implementation Guides (Questions and Answers), and widely recognized and common industry...
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