Gapp

Generally Accepted Accounting Principles (GAPP) is very important when it comes to the world of accounting. GAPP is important as it is a way to try to set a standard when it comes to accounting principles and can be used in the preparation of financial statements. The source hierarchy is important as it can help determine what literature would be needed for a specific accounting transaction to ensure that a company stays in compliance. There are four levels in the hierarchy with each being labeled by a letter (A, B, C, and D). Column A is considered the most authoritative and column D is the least. If a situation arises where multiple levels could be considered, then the highest level would be used. There are two primary qualities that make accounting information useful for decision making. They are relevance and reliability. For the information to be relevant, the information must have the capability of being used to make a difference in a decision. The information must also be provided in a timely manner to be relevant as well. If the information is received after a decision has been met, it can be considered irrelevant, therefore, not meeting one of the primary qualities of accounting. The information must also be reliable. The information would need to be able to be verified, have faithful representation, and also be free of error a reasonable amount. This is very important. To be able to be verified, independent auditors would need to come up with similar results using the same methods the company does. To have faithful representation, the numbers would need to match what really did happen or what really did exist. And to be reasonably free of error and bias is exactly how it sounds. A company cannot choose information that would favor one party over another. There are some differences between cash basis accounting and accrual basis accounting. The main difference is that cash basis accounting is prohibited under GAPP. With cash basis accounting, companies would record revenue only when cash is actually received. They would also only record an expense when the cash is actually paid. Why is this prohibited' That is due to the fact this type of accounting does not record revenue when it is actually earned; it is recognized when the cash is received instead. Accrual basis accounting is pretty much the opposite of cash basis accounting. Companies would recognize revenues at the time that they are earned rather than when the cash is actually received. Also, with accrual basis accounting, the companies also recognize expenses when they are actually incurred rather than when the company actually pays cash. There are three different types of organizations a company can choose to be. They are a sole proprietorship, partnership, and corporation. A sole proprietorship is a business owned by one person. A sole proprietorship is the easiest to setup and also gives the person control over the business. A partnership allows a person to join forces with other individuals. Rather it is for a specific skill set or resources that another individual can bring to the partnership, partnerships are also easier to establish. But they do have shared control and people would need to have clarity in a written partnership agreement. In regards to a corporation, shares of stock indicate an individual’s ownership in a company. This can be beneficial in the case that the investor would like to sell their ownership, as the investor would just need to sell their stock. One thing to keep in mind is the tax and legal liability when choosing a type of organization. A sole proprietorship or partnership can get more favorable tax treatment when compared to a corporation. But the proprietorship and partnership would also be personally liable for all debts of the business as well while corporations do not pass the liability on to the shareholders.   REFERENCES: Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2007). Intermediate Accounting. Chapters 1-2. Kimmel, P. D. (2007). Financial Accounting: Tools for Business Decision Making. Chapters 1,4.