The Financial Accounting Concepts

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Table of Contents

Generally Accepted Accounting Principles (US GAAP)
Financial Accounting Standards Board (FASB)
Securities and Exchange Commission (SEC)
Certified Public Accountant (CPA)
Annual Report
10-K
References

Generally Accepted Accounting Principles (US GAAP)

Generally Accepted Accounting Principles (GAAP) are the communication standard about the business to the external users, which might be banks or other investors. When communicating to the external users, it is important to present the business as making a high profit (AccountingWITT, 2010). However, every business must follow the principles of financial accounting. There are three assumptions forming the GAAP basis: assuming that there is a business entity, an accounting period and that the business will remain a going concern for as long as it persists (Jennifer Wilkinscolvin, 2015). The first assumption states that business owners must keep their business activities and records separate from their personal. The second assumption states that during the completion of financial reports, the activities of a business are divided over a specific time period – the accounting period. The third assumption is that as long the business does not indicate otherwise, it is considered a going concern (Jennifer Wilkinscolvin, 2015). Business failures are common, but an accountant will assume that a business can continue to operate until finding an indication that it can’t.

Financial Accounting Standards Board (FASB)

Several organizations control GAAP establishment for businesses or governmental organizations. The American Institute of Certified Public Accountants (AICPA), a professional organization of certified public accountants (CPAs), used to be the dominant organization in developing accounting standards. In the 1970s, Financial Accounting Standards Board (FASB) replaced the Accounting Principles Board (APB), a successor of AICPA. Nowadays, the FASB has become the developer of statements of financial accounting standards. Importantly, the old accounting research bulletins and APB Opinions are still effective unless specifically superseded by a FASB statement. There are also opportunities for individuals and other organizations such as the Financial Analysts Federation, the Securities Industry Associates, and CPA firms to respond to exposure drafts of proposed FASB statements.

Securities and Exchange Commission (SEC)

The Securities and Exchange Commission (SEC) is a government agency overseeing the interstate sale of securities like stocks and bonds. It is another organization that is quintessential in establishing GAAP, along with AICPA, FASB, and others. The SEC is authorized to prescribe accounting and reporting practices for enterprises under its jurisdiction, including nearly every major US business corporation. However, rather than exercising this power, the SEC tends to work closely with the FASB to develop accounting standards. The collaboration takes the form of the SEC indicating to the FASB the accounting topics it believes the FASB should address. They are partly linked through the AICPA, as the AICPA continues to influence the development of accounting standards and practices. AICPA committees consistently provide input to the FASB, the SEC, and other regulatory agencies.

Certified Public Accountant (CPA)

A Certified Public Accountant (CPA) is more than an accountant – a certified financial advisor who helps businesses, other organizations, as well as individuals with planning and reaching their financial goals (AICPA, 2020). Customers rely on businesses to communicate relevant financial and non-financial information. However, decision-makers must be confident that the information is reliable. Assuring this reliability, otherwise known as assurance services, is the primary job of CPAs. CPAs assure a broad range of subjects other than traditional financial statements (AICPA, 2020). CPAs also take a position in the income tax return preparation: when the tax season arrives, the members of the general public may require the help of their CPAs to represent them before the Internal Revenue Service (IRS) (Kimberly Dunn, 2011). Many CPAs are in public accounting practice.

Annual Report

An annual report is a document that public corporations must present to shareholders each year describing their financial conditions and operations. When completing financial reports, the activities of a business are divided over a specific period – accounting period. For most businesses, this period is one year, or annual (Jennifer Wilkinscolvin, 2015). Typically, an annual report will consist of the business overview, highlights, management’s discussion and analysis, financial statements, and the data summary. The financial statements present the profitability and strength of a company (Learn Basic Accounting Easy, 2014). The financial statement reflecting company’s profitability via reporting revenues and expenses is the income statement (Heiler, 2011). The statement of cash flows entails the cash inflows and outflows for a business over the year (Heiler, 2011). The statement of retained earnings demonstrates what was retained in earnings starting from the beginning until the end of a year. Finally, the balance sheet reflects a company’s solvency and financial position.

10-K

A 10-K form is a detailed report filed every year by a company engaged in public trade about the company’s financial performance. This report is required and submitted to the SEC and entails a more comprehensive version of the annual report. The purpose of the requirement is so that investors know the company’s financial condition and have enough information before buying or selling the corporation’s stock or before investing in the company’s corporate bonds (Learn Basic Accounting Easy, 2014). There are five sections in the 10-K report: business overview, risk factors, selected financial data, management’s analysis of financial conditions and performance, and financial statements, along with supplementary data.

References

AccountingWITT. (2010). What is Accounting? [Video]. YouTube. Web.

Association of International Certified Professional Accountants. (2020). AICPA 2020 Integrated Report (No. 2101–23511; p. 85). Web.

Heiler, N. (2011). What Is Accounting? [Video]. Vimeo. Web.

Jennifer Wilkinscolvin. (2015). The-Accounting-Assumptions[Video]. YouTube. Web.

Kimberly Dunn. (2011). 1.1 Introduction to Accounting I [Video]. YouTube. Web.

Learn Basic Accounting Easy. (2014). Purpose of Accounting (video 2 of 14) [Video]. YouTube. Web.

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