Accounting principles are also referred to as generally accepted accounting principles or GAAP. Accounting principles range from general guidelines to very detailed rules established by the Financial Accounting Standards Board (FASB).
The general guidelines, or basic accounting principles, include the cost principle, matching principle, full disclosure principle, going concern assumption, economic entity assumption, monetary unit assumption, materiality, and industry peculiarities or practices. The specific rules issued by the FASB include more than 150 statements of financial accounting standards and interpretations. (These are available at www.fasb.org.) Often, industries that are regulated by government agencies will have unique reporting standards or requirements. Many of the rules established by the FASB's predecessors continue to be part of GAAP.
Financial statements that are distributed outside of a company are to be prepared in accordance with generally accepted accounting principles. Corporations whose stock is publicly traded must have their financial statements audited by independent certified public accountants. These CPAs give assurance that the financial statements were prepared in accordance with generally accepted accounting principles.
The Securities and Exchange Commission (SEC), a U.S. government agency, has the ultimate authority over the reporting requirements of publicly traded corporations. However, the SEC allows the FASB to develop accounting rules or standards.
Sample Basic Accounting Principles Questions
1) The Conceptual _________________ was a discussion memorandum issued by the FASB in the 1970s. Out of this came the FASB Statements of Financial Accounting Concepts.
2) Accounting Research ________________ were issued between 1939 and 1959. The ARBs remain a source of accounting principles unless superseded by the APB or FASB.
3) _______________ practices or peculiarities allow for modifications of accounting principles. Often this involves companies that are regulated by the federal government, such as banks, utilities, investment firms, and insurance companies.
4) The matching principle requires that expenses be matched with the related __________________ reported on the income statement.
5) Conservatism is often associated with this rule for inventory valuation. (acronym)
6) The assumption that the purchasing power of the dollar is constant is the __________________ unit assumption.
7) A qualitative characteristic associated with verifiability and "you can depend on it".
8) The cost principle is often referred to as the ______________ cost principle.
9) As a result of this principle, assets are recorded at the amount spent to acquire them rather than the amount that will be received when they are sold.
10) Accrual accounting is associated with this principle.______