Basic Accounting Concepts and Business Structures

Sources of Generally Accepted Accounting Principles

The Generally Accepted Accounting Principles (GAAP) respected in the accounting and auditing fields are prescribed by the Financial Accounting Standards Board (FASB). GAAP is a hierarchy of conventions, rules, and procedures which includes “not only broad guidelines of general application but also detailed practices and procedures” (Thompson, 1993, 1).

Effective Accounting Information

When one thinks of Accounting, quantity is usually the first thing that comes to the mind. However important that quantity may be, effective Accounting begins with quality. The primary qualities of accounting information are relevance and reliability. Relevant information means that the information provided assists to confirm or correct the past expectations (feedback value) and predict the outcome of events (predictive value) (Kieso, Weygandt, & Warfield, 2007). Of course, these values are actually only valuable if provided in a timely manner and done in a manner that is the epitome of reliability. Reliable accounting is verifiable through independent auditors, representational of actual occurrences, and presented in a manner that is unbiased and clearly neutral (Kieso, Weygandt, & Warfield, 2007).. After all, it is the quality of accounting that makes the quantities reported useful.

Accrual-Based Accounting vs. Cash-Based Accounting

Accrual-based accounting revolves around the time period of the service. For example, if an item is sold and the bill collected by invoice, the transaction is indicated in the financial statements that go with the period of the service. Although payment on the invoice might not be until the next period, one would still indicate it in the same period as the time of service. This is contrary to cash-based accounting, which calls for the transaction posting in the period that the payment was collected. Prohibited under GAAP, cash-based accounting does not recognize the matching principle....