| Accountants are the keepers of the standards. | | | | a company's assets is the original cost of those |
| They are the ones who make sure that when we | | | | assets less suitable depreciation or amortization. |
| look at a financial statement, we can be | | | | This keeps companies from stating their assets at |
| reasonably that it was built using sound accounting | | | | market value, which is not only difficult to |
| practices and that it is comparable to other | | | | ascertain, but very subjective in nature. Historical |
| audited financial statements for other companies. | | | | cost provides the actual cost which is very |
| That sounds like a daunting task, but never fear. | | | | objective. |
| The accounting professional is in business to help | | | | 2. Revenue Recognition Principal: This simply states |
| you through all this. | | | | that revenue is recognized when it is earned, |
| The accounting profession is self-regulated. They | | | | which may be a different time than it is received. |
| decide the most appropriate way to record | | | | For example, if your company provides a service |
| company activity on the financial books of record. | | | | at the end of December, but you customer |
| They do this through an august board of | | | | doesn't pay you until January of the following |
| seasoned professionals, the Accounting Practices | | | | year, your December revenue total will include |
| Board of the American Institute of Certified Public | | | | that amount. January will not, even though that is |
| Accountants (AICPA). This group defines what is | | | | the month in which you deposited the payment. |
| known as "Generally Accepted Accounting | | | | 3. Full Disclosure Principle: Any information, |
| Principals" or GAAP, which all public accountants | | | | whether or not strictly financial, that is relevant to |
| must adhere to on behalf of all their clients. | | | | the business and may have a future impact, must |
| The process used to introduce new GAAP or | | | | be disclosed. All transactions must be posted, of |
| change old GAAP is beyond the scope of this | | | | course. But even further, this principle provides |
| paper, but it is a lengthy process with plenty of | | | | for disclosure of contingencies. For example, if |
| review opportunities for all CPAs and business | | | | your company is being sued, the lawsuit must be |
| people. | | | | analyzed for expected chance of loss. This |
| THE PURPOSE OF GAAP | | | | contingency must be disclosed in a footnote of |
| The main purpose of having GAAP is to assure | | | | the financial statements. This is to prevent a loan |
| consistency in accounting practices, not only within | | | | officer or investor from not knowing this possibly |
| a company, but across all regulated companies. | | | | impacting information when making decisions |
| The SEC requires all publicly held companies to be | | | | regarding investments in or loans to the company. |
| audited at least annually by a Certified Public | | | | 4. Matching Principle: Put simply, revenue must be |
| Accountant (CPA). The CPA assures the | | | | matched to the expenses that helped to create it. |
| stockholders that they can count on the financial | | | | This is why you have accruals and deferrals. The |
| information from the company, because it is in | | | | expenses associated with earning revenue for this |
| compliance with GAAP. | | | | period must also appear in this period. |
| By preparing all financial information according to | | | | GAAP ASSUMPTIONS |
| GAAP,o Management can depend on the records | | | | GAAP assumes the following: |
| and make course corrections for their individual | | | | 1. Going Concern Assumption: The company or |
| departments or the company as a whole for the | | | | entity is a "going concern" and is not likely to end |
| betterment of the company.o Investors and | | | | operations in the current year. It is expected to |
| lenders can make sound decisions based on the | | | | remain in business for the foreseeable future. Any |
| financial records of the company.o Stockholders | | | | exceptions to this assumption must be disclosed. |
| and prospective stockholders get an accurate | | | | 2. Economic Entity Assumption: The company is |
| picture of the company's financial health.o Stock | | | | an independent entity and is separate from it's |
| can be valued fairly on the marketo Deceptive, | | | | owners. |
| unfair and even criminal practices are minimized. | | | | 3. Monetary Unit Assumption: The currency used |
| PRIMARY PRINCIPLES | | | | to measure the entity's financial performance is |
| The following are some of the primary principles | | | | stable. |
| upon which GAAP is built. This is, by no means, a | | | | 4. Periodic Reporting Assumption: Business |
| complete description of GAAP, which is very | | | | operations are reported on a regular basis, usually |
| detailed and takes much study to become expert | | | | annually. The fiscal year doesn't have to be the |
| at, but it shows the abiding purpose behind all that | | | | same as the calendar year. This is usually set |
| detail. | | | | according to the business cycle for the particular |
| 1. Historical Cost Principle: In general, the value of | | | | company. |