In this paper, I will discuss the sources of GAAP as well as the hierarchy. I will also describe the qualities of good accounting information; the differences in accrual based and cash based accounting; and the different types of business structures. General Accepted Accounting Principles (GAAP) Generally Accepted Accounting Principles (GAAP) is a term used to refer to the standard framework of guidelines for financial accounting used in any given jurisdiction which are generally known as Accounting Standards.
GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements. The American Institute of Certified Public Accountants (AICPA), which is the national professional organization of practicing Certified Public Accountants (CPAs), designated Financial Accounting Standards Board (FASB) as the body that establishes generally accepted accounting principles (GAAP) for federal reporting entities. As such, the FASB is responsible for identifying the GAAP hierarchy for federal reporting entities.
The FASB is working on a standard, The Hierarchy of Generally Accepted Accounting Principles, that defines the meaning of generally accepted accounting principles. This standard identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements. The standard categorizes the major sources of GAAP as follows: a. Officially established accounting principles consist of FASB Statements of Federal Financial Accounting Standards (Standards) and Interpretations.
FASB Standards and Interpretations will be periodically incorporated in a publication by the FASB. b. FASB Technical Bulletins and, if specifically made applicable to federal reporting entities by the AICPA and cleared by the FASB, AICPA Industry Audit and Accounting Guides. c. Technical Releases of the Accounting and Auditing Policy Committee of the FASB. d. Implementation guides published by the FASB staff, as well as practices that are widely recognized and prevalent in the federal government. Qualities of accounting information
The FASB identified the qualitative characteristics of accounting information that distinguish better information from inferior information for decision-making purposes. Relevance and reliability are the two primary qualities that make accounting information useful for decision making. To be relevant, accounting information must be capable of making a difference in a decision. Relevant information helps users predict the ultimate outcome of past, present, and future events. Relevant information also helps users confirm or correct prior expectations and is available to decision makers before it loses its capacity to influence their decisions.