Generally Accepted Accounting Principles Essay

1270 Words6 Pages
Part I.
A. Generally Accepted Accounting Principles. GAAP is not a fixed set of rules. It is a guideline or more precisely a group of objectives and concepts that have evolved over 500 years from the basic concepts of Luca Pacioli set forth in the 1400s. It governs how financial statements are prepared and presented in the United States. The Financial Accounting Standards Boards (FASB), the American Institute of Certified Public Accountants and the Securities and Exchange Commission (SEC) provide guidance about acceptable accounting practices. Some of the reasons we use GAAP are that any business that expects anyone from outside their company to look at their financial data needs to use GAAP. Compliance with GAAP helps maintain
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For example, a tract of land which was purchased 50 years ago for $10,000 may be worth $1 million today, but it will be recorded on the balance sheet at its historical cost of $10,000. The historical cost principle is used because of its reliability and freedom from bias when compared to the fair market value principle.
C. Accrual Basis vs. Cash Basis Accounting. In accrual basis accounting, income is reported in the fiscal period it is earned, regardless of when it is received, and expenses are deducted in the fiscal period they are incurred, whether they are paid or not. In other words, using accrual basis accounting, you record both revenues and expenses when they occur. The difference between the two types of accounting is when revenues and expenses are recorded. In cash basis accounting, revenues are recorded when cash is actually received and expenses are recorded when they are actually paid (no matter when they were actually invoiced).
D. Current Assets and Liabilities vs. Non-Current items. Before you go into this first you must know what the definition of assets is. Assets equal things of value. Three requirements of an asset are, it has to be controlled by the entity, valuable to the entity and have measurable costs. Controlled by the entity basically means the item has to be owned, like rental space, employees and contracts for valuable people. Valuable
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