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.