3 1 Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements Principles of Accounting, Volume 1: Financial Accounting

According to accounting historian Stephen Zeff in The CPA Journal, GAAP terminology was first used in 1936 by the American Institute of Accountants (AIA). Federal endorsement of GAAP began with legislation like the Securities Act of 1933 and the Securities Exchange Act of 1934, laws enforced by the U.S. Today, the Financial Accounting Standards Board (FASB), an independent authority, continually monitors and updates GAAP. Without regulatory standards, companies would be free to present financial information in whichever format best suits their needs.

The main purpose of accounting principles is to establish a framework for how financial accounting is recorded and reported on financial statements. Accounting principles are guidelines that companies and other agencies must abide by when reposting their financial data and results. These guidelines and rules must be followed by accountants to ensure that financial data is standardised across borders.

Accounting and Accountability

As you may also recall, GAAP are the concepts, standards, and rules that guide the preparation and presentation of financial statements. Remember, the entire point of financial accounting is to provide useful information to financial statement users. If everyone reported their financial information differently, it would be difficult to compare companies.

• When a publicly traded company in the United States issues its
  financial statements, the financial statements have been audited by
  a Public Company Accounting Oversight Board (PCAOB) approved
  auditor.
• In baseball, and other sports around
  the world, players’ contracts are consistently categorized as
  assets that lose value over time (they are amortized).
• The Great Depression in 1929, a financial catastrophe that caused years of hardship for millions of Americans, was primarily attributed to faulty and manipulative reporting practices among businesses.
• For example, Lynn Sanders purchases two cars; one is used for
  personal use only, and the other is used for business use only.
• GAAP is also used in the preparation of financial statements by government entities.

Our PRO users get lifetime access to our accounting principles cheat sheet, flashcards, quick test, and more. The following principles of accounting are used by accountants to help guide their recording of business transactions. We define an asset to be a resource that a company owns that has
an economic value. We also know that the employment activities
performed by an employee of a company are considered an expense, in
this case a salary expense. In baseball, and other sports around
the world, players’ contracts are consistently categorized as
assets that lose value over time (they are amortized).

What are Accounting Principles?

In this case, it is going to record 1/12 of the annual expense as a monthly period cost. Overall, the “matching” of expenses to revenues projects a more accurate representation of company financials. When this matching is not possible, then the expenses will be treated as period costs. This concept is important when valuing a transaction for which the dollar value cannot be as clearly determined, as when using the cost principle. Conservatism states that if there is uncertainty in a potential financial estimate, a company should err on the side of caution and report the most conservative amount. This would mean that any uncertain or estimated expenses/losses should be recorded, but uncertain or estimated revenues/gains should not.

Principles and concepts of accounting

The board comprises seven full-time, impartial members, ensuring that it works for the public’s best interest. The Governmental Accounting Standards Board (GASB) estimates that about half of the states officially require local and county governments to adhere to GAAP. After each semester or quarter, your grade point average (GPA) is updated with new information on your performance in the classes you completed. This gives you timely grading information with which to make decisions about your schooling. When an account produces a balance that is contrary to what the
expected normal balance of that account is, this account has an
abnormal balance.

Underlying assumptions or concepts

Members of the public can attend FAF organization meetings in person or through live webcasts. Integrity Network members typically work full time in their industry profession and review content for Accounting.com as a side project. All Integrity Network members are paid members of the Red Ventures Education benefits of online payroll accounting Integrity Network. Since much of the world uses the IFRS standard, a convergence to IFRS could have advantages for international corporations and investors alike. For instance, GAAP allows companies to use either first in, first out (FIFO) or last in, first out (LIFO) as an inventory cost method.

The International Accounting Standards Board (IASB) issues International Financial Reporting Standards (IFRS). These standards are used in more than 120 countries, including those in the European Union (EU). My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers.

This assumption describes the time interval between financial statement reports. The period assumption states that a company can present useful information in shorter time periods, such as years, quarters, or months. The information is broken into time frames to make comparisons and evaluations easier. The information will be timely and current and will give a meaningful picture of how the company is operating. In Australia, readers of the annual financial statements for publicly listed companies can assume that the information contained within that statement pertain just to that specific financial year, and no other.