Explaining Basic Accounting

Explaining Basic Accounting Concepts and Business Structures

Basic accounting concepts are essential in forming the basis of the Generally Accepted Accounting Principles and the importance of the hierarchy structure. Understanding effective accounting information, one must understand the importance of the qualities of accounting information. Determining the difference between accrual based accounting and a cash basis of accounting is significant. Last, defining the types of business structures is imperative in determining the organization of new businesses.

Sources of Generally Accepted Accounting Principles

Generally accepted accounting principles (GAAP) are the guidelines for financial accounting, generally known as accounting standards. According to Kieso (2007), the American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct requires that members prepare financial statements in accordance with the GAAP.

The Securities and Exchange Act of 1934 indicates, “that any companies that issue securities to the public or are listed on a stock exchange are required to file audited financial statements with the Security and Exchange Commission (SEC)” (Kieso, 2007, p. 6). The SEC found that many no-publicly trades organizations did not fall under its securities laws and developed the Financial Accounting Standards Board (FASB) and the Government Accounting Standards Board (GASB) to improve accounting standards and principles in the private, state, and local sectors.

The Hierarchy of Generally Accepted Accounting Principles

To identify the sources of accounting principles used for financial statements, there are four major sources of the GAAP; FASB Standards, Interpretations and Staff Positions, APB Opinions, and AICPA Accounting Research Bulletins. These four major sources fall into specific categories, Category A, the most authoritative to Category D, the least authoritative. The importance of the hierarchy of GAAP is the...