Basic Accounting Concepts

Basic Accounting Concepts

ACC/537

January, 30 2012

Professor Roberts

Sources of GAAP

Publicly traded companies, along with some private companies, in the U.S. use generally accepted accounting principles (GAAP) to prepare and standardize their financial statements. “GAAP is implemented through measurement principles and disclosure principles” ("Gaap: What Does It Mean?", 2008). Measurement principles determine and recognize basis and timing of items that enter the cycle and impact financial data. This includes which period to recognize where transactions are recorded. Disclosure principles determine which numbers are essential to be presented in financial statements. GAAP is intended to reflect economic reality; it helps to make financials much easier to read by investors by making them comparable and understandable. It also helps creditors to make rational credit decisions on a corporation. To make financials more helpful GAAP requires financial reports to be relevant, reliable, consistent, and comparable.

The hierarchy for GAAP begins with the principles established by the FASB and its predecessors, the APB and the AICPA Committee on Accounting Procedure. From that foundation, the hierarchy formulates a "pecking order" for all the rules and procedures that are incorporated in the preparation of financial statements. The hierarchy consists of four categories each which establishes a different level of authority. “The first category consists of (1) FASB Statements of Financial Accounting Standards, (2) FASB Interpretations, (3) APB Opinions, and (4) AICPA Accounting Research Bulletins. The second category consists of (1) FASB Technical Bulletins and, if cleared by the FASB,(2) AICPA Statements of Position and (3) AICPA Industry Audit and Accounting Guides. The third consists of (1) AcSEC Practice Bulletins that have been cleared by the FASB and (2) consensus positions of the FASB Emerging Issues Task Force (EITF). And finally the fourth is (1) AICPA...