Basic Accounting Concepts and Business Structures

Explaining Basic Accounting Concepts and Business Structures

Topic 1: Sources of GAAP, order of hierarchy and explanation.

1. Securities and Exchange Commission. The federal government established SEC to develop and standardize financial information present to the public, such as stockholders. The majority of companies that issue securities to the public or are listed in a stock exchange are required to submit their financial statements with the SEC.

2. Under the direction of the SEC, the American Institute of Certified Public Accountants has played and important role in the development of GAAP. The AICPA has is the leader in developing accounting standards. Moreover, it develops and grades the CPA exam.

3. The Financial Accounting Standard Board (FASB) establishes and improves standards of financial accounting to guide the public, which included issuers, investors, and auditors. The FABS issues Standard Statements, which must comply with the SEC. Once the board members of FASB approve a Statement, it becomes GAAP.

4. The Governmental Accounting Standards Board (GASB) was created under the Financial Accounting Foundation (FAF) to address state and local governmental financial statements, since they are not comparable with financial reports prepared by private business organizations. All the entities mentioned above comply with the federal government and with the SEC.

Topic 2: Qualities of Accounting information

The quality of accounting information must provide internal users (controllers, CFOs CEOs, etc.) and external users (investors, creditors, etc.) relevant information to make decisions. According to the reading, the primary characteristics of the qualities of accounting information consist of relevance and reliability. To be relevant, accounting information must play a key role in the decision making process. Accounting information is reliable when it is verifiable, represents a faithful representation, is reasonable free of errors, and it is neutral.

Secondary qualities consist of comparability and consistency. Information that has been reported in measuring similar companies in an industry is considered to be comparable. Consistency applies to the principle that an entity