Basic Accounting Concepts

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 Staff Positions; Financial Accounting Concepts and Emerging Issues Task Force Statements. The FASB issues financial accounting standards, which are considered GAAP (Kieso, 2007). FASB issues interpretations, which are considered authoritative for purposes of determining GAAP. The staff positions provide interpretive guidance and also minor amendments to standards and interpretations.

Accounting Principles Board Opinions were intended to be based on research studies and be supported by reasons and analysis by the Accounting Principles Board (APB). This board was established in 1959 to (1) advance the written expressions of accounting principles, (2) determine appropriate practices, and (3) narrow the areas of difference and inconsistency practice (Kieso, 2007).

The American Institute of Certified Public Accountants (AICPA) was established in 1939, and composed of practicing CPA’s. The AICPA issued 51 Accounting research Bulletins. The AICPA was a primary source of defining GAAP for state and local governments. The AICPA failed to provide the needed structured body of accounting principles, and therefore the APB was created.

Accounting information should be useful to the intended user. Understandability is the quality of information that informed users will make...