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Common assessment - Essay Example

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Generally Accepted Accounting Practice Class University Date I. Introduction/Background Information.  Generally Accepted Accounting Principles or GAAP is the collection of the commonly set of rules of accounting standards used for financial reporting…
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Common assessment

Download file to see previous pages... In the United States, it is the Financial Accounting Standards Board (FASB) that sets the GAAP standards for private firms while it is the IASB sets principles for international accountants (Horngren et al, 2008). Compliance with GAAP is mandatory by every business operating in the USA. Corporations that are public companies are closely monitored by the Securities and Exchange Commission (SEC) to ensure their compliance to GAAP. II. GAAP and description of the accounting principles In the GAAP there exists accounting principles which also serves as measurements of conventions that are significant which are cost recording, revenue recognition and the matching principle. The recognition principle states that a company records revenues in its accounts only when it has earned and realized the revenue (Horngren et al, 2008 p.703). Revenues therefore cannot be recognized if it has not been earned. A second important convention is the matching principle which states that revenues must be linked to the expenses associated with them. Accountants apply the matching principle by identifying the revenue recognized during a period and by linking the expenses to the recognized revenue directly ( Horngren, 2008 p.703). The Cost Principle This GAAP accounting principle states that the recording of cost must be at their fair market price. Fair market price is determined by the amount reflected on documents accompanying the goods and/or services to ensure objectivity and accuracy of accounting when purchases are made. The effect of this costing principle on assets is that its value will not change until the market value of the asset changes. To effect this change in the books according to GAAP principle, a new require a new transaction as an evidence to effect the change of the value of the asset. In cases where objective evidence is not available to ascertain cost, the transaction can instead be recorded at its fair market value as determined by a third party appraiser (McKeown, 1973). The Revenue Recognition Convention The recognition principle states that a company records revenues in its accounts only when it has earned and realized the revenue (Horngren, 2008 p.703). Revenue cannot be recognized if it has not been earned. This principle states that revenue must only be completed and recorded into a company’s books when the transaction is already completed. This means that revenue will only be recorded once actual payment is received. On occasions when transactions involve huge projects which take a very long time to finish such as construction of buildings, revenue is done an accrual basis whereby it will bill its client on periodic basis on the amount of work that has been done or completed and recognize the revenue even if there is still work in progress (Klueh, 2009). Recognizing revenue correctly is important to the accuracy of the financial statements because earning is a critical aspect of a financial statement which can affect the company’s many stakeholders. The Matching Principle A second important convention is the matching principle which states that revenues must be linked to the expenses associated with them. Accountants apply the matching principle by identifying the revenue recognized during a period and by linking the expenses to the recognized revenue directly (Horngren, 2008 p.703). This can be likened to the revenue recognition principle whereby expenses related to the revenue that were earned during a certain accounting period must be reflected in the books of the ...Download file to see next pagesRead More
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