GAAP and IASB/ TYPES OF BUSINESS

Generally Accepted Accounting Principle (GAAP)

Common set of standards that are generally accepted and universally practised. These set of standards indicate how to report economic events. Primary accounting standards setting bodies in US is Financial Accounting Standard Board (FASB) and is called U.S. GAAP and are used by companies in U.S.

International Accounting standard Board (IASB) sets Standards which are called International Financial reporting Standards (IFRS). These sets are usually followed by the international countries than U.S.

As markets are becoming more global we need a system which allows easy comparison among the companies. So as to increase comparability the two standard setting bodies have made efforts to reduce the difference between U.S. GAAP and IFRS.

Measurement Principles

Generally Accepted Accounting Principles (GAAP) uses two measurement principles. Selection of which principle to follow depends on the relevance and faithful representation which makes accounting information useful fair decision making. Relevance means making a difference in decision making and faithful representation implies true and factual data.

GAAP uses following principles:

Historical Cost Principle

Historical cost Principle (or cost principle) allows companies to record assets at their cost.

Fair Value Principle

In Fair value principle assets and liabilities are reported at fair value or the value (price) at which those assets or liabilities currently exist.

Selection of which principle depends on the relevance and faithful representation which makes accounting information useful for decision making.

Assumptions

Now, assumptions provide a foundation for accounting process. There are two main accounting assumptions:

Monetary Unit Assumption and Economic Entity Assumption

Monetary unit assumption

According to this assumption, companies accounting process records transactions that can be expressed in terms of money. It does not take into account various factors like the health of the owner, quality of the service, morale of the employee.

Types of businesses

Proprietorship

It is the business owned by a single person generally called the proprietorship.

It involves small amount of money/ capital. The owner receives profit or incur loss and is liable for a debts of the business.

Partnership

It is owned by two or more persons as partners.

A partnership agreement sets rules of initial investment duties of each partner, division of net income or net loss and settlement to be made upon death.

Corporation

It’s a business whose ownership can be divided into transferable shares of stocks owned by stockholders. Stockholders may transfer all or part of their ownership of their shares to other investors at any time i.e. sell their shares.

Comments

Users of Accounting Information/ Internal/ External

Accounting involves the process of identifying, recording and communicating the economic events to the interested users. Now, who are these interested users of accounting? Users of Accounting Information are divided into two groups: Internal and External. Internal Users of Accounting Internal users of accounting information are the owners, managers who plan, organise and run the business.Following are the types of internal users: Owners Owners need to asses the overall performance of their business and to do so, financial statements are used. Owners use information from financial statements to estimate the profitability, losses and the risk factor of the overall business. Managers Managers use the accounting information for the purpose of planning, monitoring and decision making in business. Manager through accounting information, decides how much finance is to be used in the production process and allocates the finance among various resources. Manager uses the data for the budget...

BASIC ACCOUNTING EQUATION/ ASSETS, LIABILITY, STOCKHOLDER'S EQUITY and its Components

Basic Accounting Equation Two basic elements of a business is what it owns and what it owes. Assets Assets are resources a business owns. The business uses assets to carry out production activities. Asset possess the capacity to provide future benefits or services. In a business these future services or benefits eventually results in future inflows. Liabilities These are claims against assets i.e. existing debt and obligations. All businesses usually borrow money and purchase merchandise on credit. Every economic activities performed result in payables of various sorts: Account payable: purchase of goods on credit from suppliers. Note payable: it includes money borrowed from the banks. Salaries and wages payable to employees sales and real estate taxes payable to the local government. All these people are creditors to whom business owes money. Creditor’s claims are paid before ownership claims. Stockholder’s equity The ownership claim on a corporation’s total asse...

WHAT IS AN ACCOUNT? What is DEBIT and CREDIT ?

What is an account? An account is an individual accounting record which records increase or decrease in specific asset, liability, or stockholder’s equity. For example: Cash, Equipment, Accounts Receivable, Accounts Payable, etc. form an account. (Note: specific account name is capitalised) An account in its simplest form consists of three parts: (1) Title (2) Left side or Debit (3) Right side or credit. Since it resembles letter T therefore it is called T-account. Debit and Credit Debit represent the left side of the account and credit represent the right side of the account. Debit is abbreviated as Dr. and credit is abbreviated as Cr. Debits and credits does not mean increase or decrease as it is commonly thought. Debit are transfer of value to the account. Credit are transfer of value from the account. Therefore Debit increases assets, expenses, and dividends. Credit increases revenues, liabilities, and common stock. As we know, the basi...

Financial Accounting

Search This Blog