Accounting

Accounting

Part 1

What Is Accounting?

The purpose of accounting is to provide information that will help you make correct financial decisions. Your accountant’s job is to give you the information you need to run your business as efficiently as possible whilemaximizing profits and keeping costs low.

Who Uses Accounting Information?

In the world of business, accounting plays an important role to aid in making critical decisions. The more complex the decision, the more detailed the information must be. Individuals and companies need different kinds of information to make their business decisions.

Who Are the SEC, AICPA, and the FASB?

(or What Is This, Alphabet Soup?)

Congress created the Securities and Exchange Commission (SEC) in 1934.At that time, the Commission was given the legal power to prescribe the accounting principles and practices that must be followed by the companies that come within its jurisdiction. Generally speaking, companies come under SEC regulations when they sell securities to the public, list their securities on any one of the securities exchanges (New York Stock Exchange or American Exchange for example), or when they become greater than a specified size as measured by the firm’s Assets and number of shareholders. Thus, since 1934, the SEC has had the power to determine the official rules of accounting practice that must be followed by almost all companies of any significant size. Instead, for the most part, the SEC assigned the responsibility of identifying or specifying GAAP to the American Institute of Certified PublicAccountants (AICPA). That role has now been transferred to the Financial Accounting Standards Board (FASB). All rulings from the FASB are considered to be GAAP. The FASB is currently collaborating on a project with the International Accounting Standards Board to make it easier for companies to report financial statements, so that separate statements are not needed for U.S. and international markets.

A firm must adopt the accounting practices recommended by the FASB or the SEC unless they can identify an alternative practice that has “substantial authoritative support.” Even when a company can find “substantial. authoritative support” for a practice it uses which differs from the one recommended, the company must include in the financial statement footnotes (or in the auditor’s report) a statement indicating that the practices used are not the ones recommended by GAAP. Where practicable, the company must explain how its financial statements would have been different if the company had used Generally Accepted Accounting Principles.

Part 1.

End