Explaining Basic Accounting Concepts and Business Structures
Explaining Basic Accounting Concepts and Business Structures
To understand accounting there are several key concepts and terms to be familiar with. One must know where Generally Accepted Accounting Principles came from as well as how businesses form.
Sources of Generally Accepted Accounting Principles
The Securities and Exchange Commission (SEC), American Institute of Certified Public Accountants (AICPA), Financial Accounting Standards Board (FASB), and the Government Accounting Standards Board (GASB) are the four organizations who developed generally accepted accounting principles (GAAP).
The FASB issued a standard, “The Hierarchy of Generally Accepted Accounting Principles,” that defines the meaning of GAAP. “This standard identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements” (Kieso, 2007, p. 12). The most authoritative sources in Category A are the FASB Standards, Interpretations, and Staff Positions, APB Opinions, and AICPA Accounting Research Bulletins. If a company comes across a situation that is not answered in Category A then Categories B through D are available to search. If there is a discrepancy between any category, then the company should follow the higher category (Kieso, 2007, p. 12).
Qualitative Characteristics of Accounting
Primary Characteristics
“Relevance and reliability are the two primary qualities that make accounting information useful for decision making” (Kieso, 2007, p. 32).
Relevance. In order for accounting information to be relevant, it should “help users predict the ultimate outcome of past, present, and future events” or predictive value (Kieso, 2007, p. 33). It must also “help users confirm or correct prior expectations” or feedback value (Kieso, 2007, p. 33). Last it “is available to decision makers before it loses its capacity to influence their decisions” or timeliness (Kieso, 2007, p. 33).
Reliability. Reliable
To understand accounting there are several key concepts and terms to be familiar with. One must know where Generally Accepted Accounting Principles came from as well as how businesses form.
Sources of Generally Accepted Accounting Principles
The Securities and Exchange Commission (SEC), American Institute of Certified Public Accountants (AICPA), Financial Accounting Standards Board (FASB), and the Government Accounting Standards Board (GASB) are the four organizations who developed generally accepted accounting principles (GAAP).
The FASB issued a standard, “The Hierarchy of Generally Accepted Accounting Principles,” that defines the meaning of GAAP. “This standard identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements” (Kieso, 2007, p. 12). The most authoritative sources in Category A are the FASB Standards, Interpretations, and Staff Positions, APB Opinions, and AICPA Accounting Research Bulletins. If a company comes across a situation that is not answered in Category A then Categories B through D are available to search. If there is a discrepancy between any category, then the company should follow the higher category (Kieso, 2007, p. 12).
Qualitative Characteristics of Accounting
Primary Characteristics
“Relevance and reliability are the two primary qualities that make accounting information useful for decision making” (Kieso, 2007, p. 32).
Relevance. In order for accounting information to be relevant, it should “help users predict the ultimate outcome of past, present, and future events” or predictive value (Kieso, 2007, p. 33). It must also “help users confirm or correct prior expectations” or feedback value (Kieso, 2007, p. 33). Last it “is available to decision makers before it loses its capacity to influence their decisions” or timeliness (Kieso, 2007, p. 33).
Reliability. Reliable
References: Kieso, D.E., Weygandt, J. J., & Warfield, T. D. (2007). Intermediate accounting (12th ed.). Hoboken, NJ: Wiley. Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2007). Financial accounting: Tools for business decision making (4th ed.). Hoboken, NJ: Wiley.