Explaining Basic Accounting Concepts and Business Structures

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Explaining Basic Accounting Concepts and Business Structures Explaining Basic Accounting Concepts and Business Structures Generally Accepted Accounting Principles (GAAP) identifies the sources of accounting principles to be used in the preparation of financial statements. Sources of GAAP are Financial Accounting Standards Board (FASB) Standards, Interpretations, and Staff Positions; Accounting Principles Board (APB) Opinions, and American Institute of Certified Public Accountants (AICPA) Accounting Research Bulletins. Source hierarchy, also known as the House of GAAP, provides alternative guidance sources if the specific accounting transaction is not covered by the major sources of GAAP. The hierarchy provides a roadmap for the accountant to follow to insure the standards/rules that are being followed are the most acceptable pertaining to the accounting situation. The primary qualities of accounting are Relevance and Reliability, which help to distinguish between more useful and less useful information. In order for accounting information to be relevant, it must be able to make a difference in the decision-making process. Information that is relevant helps to predict the outcome of past, present and future events; it has predictive value. The information also helps to confirm and/or correct prior expectations. Finally, the information must be available to decision makers while it still has the capacity to influence decision. Accounting information is considered reliable if it can be verified, is free of error and bias, and is a faithful representation. There are two types of accounting systems; accrual basis and cash basis. In an accrual-basis system, the transactions are recorded in the periods in which the events occur. This means that revenues are recognized when earned rather than when the cash is received, and expenses are

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