Essay about Generally Accepted Accounting Principles

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There are general rules and concepts that preside over the field of accounting. These general rules, known as basic accounting principles and guidelines, shape the groundwork on which more thorough, complex, and legalistic accounting rules are based. The Financial Accounting Standards Board (FASB) uses the basic accounting principles and guidelines as a foundation for their own comprehensive and complete set of accounting rules and standards. GAAP is exceptionally useful because it attempts to regulate and normalize accounting definitions, assumptions, and methods. Because of generally accepted accounting principles one is able to presuppose that there is uniformity from year to year in the methods that are used to prepare a …show more content…

One explanation of why firms might choose to put into practice conservative accounting practices lies in efficient contracting theory, for example, conservative accounting can be used as part of a firms strategy to ease the conflicts that arise among the many claimants of a firm’s net assets. This is because conservative accounting methods place restrictions on the distribution of those net assets thereby limiting the scope for self-serving opportunistic behavior. Conservative accounting can also help in bringing into line the interests of managers and shareholders through its impact on accounting earnings measures that are regularly used in management compensation contracts (Iyengar & Zampelli, 2010). The literature on conservatism accounting is very limited. Watts (2003), has suggested that conservatism is related to debt contracts, while Gjesdal & Antle (2001) suggest that conservatism is the interaction between income measurement and dividend covenants. Even though conservatism may be most favorable, the result derives from shareholders trading off cash flows in different periods, not from the need to protect the interests of creditors. Another theory used in accounting is that of Materiality. This notion necessitates that accounting centers on material facts and not on facts that are immaterial to figuring revenues. Only transactions that have monetary

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