10 Basic Accounting Principles & Key Assumptions 2019 GAAP Guide

The periodicity assumption requires preparing adjusting entries under the accrual basis. Without
the periodicity assumption, a business would have only one time period running from its inception to
its termination. Under the cash basis, we record revenues when cash is
received and expenses when cash is paid. Under the accrual basis, however, we record revenues when
services are rendered or products are sold and expenses when incurred.

• Then, accountants attempt to prepare accurate
  reports on the entity’s activities for these periods.
• If neither of the above is logical, expenses are reported in the accounting period that the expenses occur.
• International accounting rules are called
  International Financial Reporting Standards (IFRS).
• According to the periodicity (time periods) assumption, accountants divide an entity’s life
  into months or years to report its economic activities.

A potential or existing investor wants timely information by which to measure the performance of the company, and to help decide whether to invest. The revenue recognition principle directs a company to recognize revenue in the period in which it is earned; revenue is not considered earned until a product or service has been provided. This means the period of time in which you performed the service or gave the customer the product is the period in which revenue is recognized. GAAP  are the concepts, standards, and rules that guide the preparation and presentation of financial statements. International accounting rules are called International Financial Reporting Standards (I.F.R.S.).

Conservatism Principle

If customers pay in advance, the revenues will be recognized (reported) after the money was received. The revenue recognition principle directs a company to recognise revenue in the period in which it is earned; revenue is not considered earned until a product or service has been provided. This means the period of time in which you performed the service or gave the customer the product is the period in which revenue is recognised. GAAP is a set of procedures and guidelines used by companies to prepare their financial statements and other accounting disclosures. The standards are prepared by the Financial Accounting Standards Board (FASB), which is an independent non-profit organization. The purpose of GAAP standards is to help ensure that the financial information provided to investors and regulators is accurate, reliable, and consistent with one another.

Some companies may report both GAAP and non-GAAP measures when reporting their financial results. GAAP regulations require that non-GAAP measures be identified in financial statements and other public disclosures, such as press releases. GAAP helps govern the world of accounting according to general rules and guidelines.

Following from that, Andrea will be personally responsible for any debts that the business incurs, and her personal assets may be used to settle business debts. Thus, if Andrea has incurred the responsibility to pay for the goods, she has clearly increased a liability. ‘Duality’ refers to the fact that every transaction has a ‘dual aspect’ and therefore requires the use of ‘double entry’ accounting. For this reason, candidates would be wise to complete as many practice questions as possible before taking the exam. It is also the reason why the topic can only be touched on briefly in a short article such as this.

The customer did not pay cash for the service at that time and
was billed for the service, paying at a later date. When should
Lynn recognize the revenue, on August 10 or at the later payment
date? She
provided the service to the customer, and there is a reasonable
expectation that the customer will pay at the later date. Some companies that operate on a global scale may be able to
report their financial statements using IFRS. The SEC regulates the
financial reporting of companies selling their shares in the United
States, whether US GAAP or IFRS are used.

This might mean allocating costs over more than one accounting or reporting period. GAAP are the concepts, standards, and rules that guide the preparation and presentation of financial statements. International accounting rules are called International Financial Reporting Standards (IFRS). Publicly understanding taxes traded companies (those that offer their shares for sale on exchanges in the United States) have the reporting of their financial operations regulated by the Securities and Exchange Commission (SEC). When accountants record business transactions for an entity, they assume it is a going concern.

1 Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements

The concept of the T-account was
briefly mentioned in
Introduction to Financial Statements and will be used later
in this chapter to analyze transactions. A T-account is called a
“T-account” because it looks like a “T,” as you can see with the
T-account shown here. IFRS is a standards-based approach that is used internationally, while GAAP is a rules-based system used primarily in the U.S. IFRS is seen as a more dynamic platform that is regularly being revised in response to an ever-changing financial environment, while GAAP is more static.

Going concern assumption

While each financial reporting framework aims to provide uniform procedures and principles to accountants, there are notable differences between them. Since the U.S. does not fully comply with IFRS, global companies face challenges when creating financial statements. Even though the FASB and IASB created the Norwalk Agreement in 2002, which promised to merge their unique set of accounting standards, they have made minimal progress. In an effort to move towards unification, the FASB aids in the development of IFRS. GAAP compliance makes the financial reporting process transparent and standardizes assumptions, terminology, definitions, and methods.

Accruals

We go into much more detail in

The Adjustment Process and
Completing the Accounting Cycle. The SEC is an independent federal agency that is charged with protecting the interests of investors, regulating stock markets, and ensuring companies adhere to GAAP requirements. A set of financial statements includes the income statement, statement of owner’s equity, balance sheet, and statement of cash flows.

Introduction to Accounting Principles

There could be financial incentives for business owners to do this and therefore the prudence principle must be observed to ensure this does not happen. For example, we can see this in practice in the published financial statements of large businesses. While the exact values to the single dollar are not communicated, the essential (material) information is provided as an aid to decision making.

GAAP Principles

With financial accounting, businesses can use both accrual and cash accounting methods to determine net income. It also uses a standard set of rules, called the Generally Accepted Accounting Principles (GAAP), to make reporting consistent across periods and encourage transparency. The business entity principle simply means that, for the purpose of maintaining accounting records, the business is treated as a separate entity from the owner(s) of the business.

Many groups rely on government financial statements, including constituents and lawmakers. The Great Depression in 1929, a financial catastrophe that caused years of hardship for millions of Americans, was primarily attributed to faulty and manipulative reporting practices among businesses. In response, the federal government, along with professional accounting groups, set out to create standards for the ethical and accurate reporting of financial information.

The
going-concern (continuity) assumption states that an entity will continue to operate indefinitely
unless strong evidence exists that the entity will terminate. The termination of an entity occurs when a
company ceases business operations and sells its assets. If liquidation appears likely, the going-concern assumption is no longer valid. This assumption describes the time interval between financial statement reports. The period assumption states that a company can present useful information in shorter time periods, such as years, quarters, or months. The information is broken into time frames to make comparisons and evaluations easier.