Basic_Accounting_Concepts

Explaining Basic Accounting Concepts and Business Structures Explaining Basic Accounting Concepts and Business Structures Good information is the basis of accounting. Development in accounting practices has led to valuable information from the standardization boards for accounting principles. Different types of companies use these standards to keep financial records for their businesses. Four sources of generally accepted accounting principles (GAAP) are the Securities and Exchange Commission (SEC), American Institute of Certified Public Accounts (AICPA), Financial Accounting Standards Board (FASB) and Government Accounting Standards Board (GASB). The SEC involvement with accounting standards dates back to the stock market crash in 1929. The United States government creates the SEC to regulate the accounting practices of American companies. The SEC oversees the accounting principles that publicly traded companies use. They use the private sector to establish the accounting principles and the SEC regulates the principles the private sector establishes. The AICPA and the FASB are two of the private sector groups that establish the GAAP. From 1939 to 1959, the AICPA establishes Accounting Research Bulletins to give guidelines for accounting. The Accounting Principles Board (APB) was later put in place to give the accounting principles a structure accountants could follow. The FASB was put in place after the APB was later found to have a lack of productivity and failure to respond soon enough to accounting abuse (Kieso, Weygandt, & Warfield, 2007). The FASB has a structure allowing it to work more efficiently and be unbiased toward an individual company. They also have a wider representation because there are more than only certified public accounts are a part of the board. The GASB is another board similar to the FASB. The GASB came in to play as a board for government accounting. The FASB assembles all parts of GAAP, calling it the Accounts Standards Codification (ASC). Accountants follow the hierarchy of GAAP to determine guidance for following GAAP. The ASC integrates all of the previous standards from other boards, such as APB, AICPA, and FASB, and put them into one form. This helps create meaningful and quality information in accounting. In order for the financial information to be relevant to the people using the information, it must be up-to-date. Releasing quarterly financial statements can keep the public informed on how the company is currently performing. Releasing this data once a year is not as relevant to the users because of the infrequency of the report. The public must be able to use the information in a timely manner so they can make a better decision on their choices involving the company (Kieso, Weygandt, & Warfield, 2007). The reliability of the information is also essential because the users need to know the information is correct. Trust in the company is accurately portraying its earnings is important to the users. Also the company should remain neutral in the information of the report. The company should not decide to leave information in or out of their report because they think it will help the report. The verification by another auditor will ensure the quality of the report. The ability for another person to take the same numbers and information on a company should be able to come up with the same report (Kieso, Weygandt, & Warfield, 2007). The comparability and consistency of the financial reports are also important. Showing the company’s information with the use of GAAP helps the users compare one company to the next. When all companies follow the GAAP, the reports provide the same basic information in the same format. Using the same accounting method for every financial report will keep the reports consistent with each other. Switching from one accounting method to another does not allow the two reports to be comparable (Kieso, Weygandt, & Warfield, 2007). Accrual accounting is the recognition of revenue or expense when the transaction of a product or service occurs between two parties. Once the transaction occurs, the agreed upon cost is written into the company’s books. Cash basis accounting is the recognition of revenue or expense when the money between two parties changes hands (Kieso, Weygandt, & Warfield, 2007). In business, companies will give terms such as 30 or 45 days to pay for the product or service. Appling accrual accounting will account for all current transactions. The revenue or expense and the time money changes hands could show up in two different accounting periods by using the cash basis (Kimmel, 2007). All businesses should apply the accrual accounting method, whether it is a sole proprietorship, a partnership, or corporation. A business run by one person is a sole proprietorship. This type of company is usually a family farm or a small bakery. This gives the owner complete control over the business. A business run by two or more people is a partnership. Operating a sole proprietorship or a partnership gives the owners a better tax advantage over a corporation (Kimmel, 2007). The owners are responsible for all legal and financial liability, unlike a corporation. Both are primarily the same, except for the number of people running the business. A corporation is another type of business structure where owners can buy stock in the company. The company stock can trade between owners on the stock market. A business as a corporation takes on all of the legal and financial liability. If a business were to fail, the owners only lose the money invested in the company. Creditors cannot go after the individual shareowners to pay back any bad debts. The company’s assets would be the only reimbursement the creditors can receive. Different business types follow GAAP standards to keep their financial statements in order. Under GAAP, accrual accounting accurately shows the company’s current finances. Establishing standards for accounting also helps companies provide quality information for their financial statements. Reference Page Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2007). Intermediate Accounting. Retrieved from https://ecampus.phoenix.edu/content/eBookLibrary2/content/eReader.aspx. Kimmel, P. D. (2007). Financial Accounting: Tools for Business Decision Making. Retrieved from https://ecampus.phoenix.edu/content/eBookLibrary2/content/TOC.aspx'assetdataid=ffdadad6-73b3-47a7-be12-68d0e04d066e&assetmetaid=8fc79796-429a-4f4e-afb4-21faacf83182.