Prespective Of Accounting
Essay by 24 • July 31, 2010 • 1,247 Words (5 Pages) • 2,372 Views
Perspective of Accounting
Generally accepted accounting principles (GAAP) are used in preparation of financial statements in the United States (Messier, Glover, & Prawitt, 2008, p. 59). GAAP standards are issued by the Financial Accounting Standards Board (FASB), which replaced the Accounting Principles Board (APB) in 1973 (Hermanson & Edwards, 1998, p. 8). The American Institute of Certified Public Accountants (AICPA) became the dominant organization responsible for the development of accounting standards from 1939 to 1959, until the APB committee succeeded the AICPA (Hermanson & Edwards). In 1934 the Securities and Exchange Commission (SEC) commissioned by Congress to administer the interstate sale of securities and has the authority to direct the accounting and reporting (Hermanson & Edwards). However, the SEC chose to work with FASB in the development of accounting standards (Hermanson & Edwards, 1998, p. 9).
The established hierarchy of generally accepted accounting principles depends on the aspect or the area of accounting being depicted by FASB. After the Sarbanes-Oxley Act in 2002, Congress enacted the development of the Public Company Accounting Oversight Board (PCAOB) to set standards and regulate auditing of the public companies. This affected the auditing standards, which also determined certain aspects of the GAAP. The impact of financial reporting and recording for accounting was scrutinized by the FASB after the financial failures of Enron, Tyco, and WorldCom (Warren, Reeves, & Fess, 2005, p. 12). FASB determined because the companies are responsible for selecting the accounting principles employed that the hierarchy of GAAP belongs in the accounting literature and not in auditing (Kieso, Weygandt, & Warfield, 2007, p. 12). Considering the field of accounting, the regulating body for members and certification process of accountants continue under the administration of the AICPA. The AICPA constantly evolves in their changing roles. Another committee that ranks in the hierarchy responsible in aiding FASB with new or unusual transactions is the Emerging Issues Task Force (EITF) established in 1984 (Kieso, Weygandt, & Warfield, 2007, p. 10). Of course, the governmental organizations do not fall under the same classifications as private or public organizations. Therefore, the Governmental Accounting Standards Board was enacted to implement standards for local and state accounting (Kieso, Weygandt, & Warfield, 2007, p. 11). According to Kieso, Weygandt, and Warfield, FASB is working on a hierarchy of GAAP, which list the least to the most authoritative from industry standards to FASB standards. This hierarchy is important in helping organizations to comply with GAAP and not violate any of the laws.
Qualitative characteristics of accounting are necessary for useful decision-making in the accounting information process. The information must be pertinent to the users and the information must make a difference while in use by the user for the information relevancy (Kieso, Weygandt, & Warfield, 2007, p. 33). Relevant information possesses predictive value improves the users' ability to predict future outcomes or events (Hermanson & Edwards, 1998, p. 188). The results of a decision centered on the predictions can reveal information providing a feedback value confirming prior expectations. The relevant information must also be timed correctly to provide accountants information when required (Kieso, Weygandt, & Warfield, 2007, p. 33). Timeliness of information is important because the age of the information determines the value of information. The older the information the less valuable the information compared to new information, which equates to the next best opportunity. In addition to relevancy the information needs to be reliable. The assertion of information must represent exactly what exists. Without the ability to verify the information, the information is not relevant and reliable. This creates an unfaithful representation and an ethical dilemma (Kieso, Weygandt, & Warfield, 2007, p. 33). A faithful representation gives details of transactions that are verifiable. The effective neutrality of information is an unbiased statement establishing a transparent representation. Without neutrality the reliability is clouded and again the unethical representation developed enables hidden agendas. The accounting information is only effective if the characteristics of relevancy and reliability are used as qualities for reporting and recording accounting information.
From the business prospective several methods of acceptable accounting methods are used. Generally smaller businesses use the cash method and larger corporations use the accrual method of accounting. Sometimes, hybrid methods are used or special methods of accounting for inventory, items of income, and various forms of expenses are used in bartering (Young & Pinheiro, 2010, p. 42). The accrual method is considered the correct method for recognizing the expenses and income because the events are recorded based on recording transaction in the period of occurrence and when earned (Kimmel, Weygandt, & Kieso, 2007, p. 160).
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