If you’ve ever wanted to know what accounting is, is this your turn to learn? Who is in charge of establishing the basic accounting standards that we all follow? Is there some kind of regulatory system to investigate and arrest people for accounting fraud? Well guess what, there is, at least to some extent either way. So listening is a quick education on accounting principles that can explain it all.
First, what is accounting anyway? Well, in simple terms, accounting is the comprehensive system of gathering and recording financial information of a company in order to prepare summaries for tax authorizations, investors, managers and others who make decisions within companies or organizations in which participate. Accounting terminology or terms can be complicated at times, and you may need to have an accounting glossary on hand that explains the terms in plain language if you are a beginner. To prevent people from committing ethical accounting fraud, America’s leading experts created the Financial Accounting Standards Board, or (FASB) for short. This was established in 1973 and replaced the Accounting Principles Board (APB). The (FASB’s) job is to analyze and review issues in the field that are presented to them. After much deliberation, they will make an assessment of what kind of action will be taken when an accounting problem occurs.
This was primarily voluntary and was very successful. Double entry accounting was founded in Italy in the 15th century and the accounting formula has changed since then. The reason the basic accounting concepts worked either was that the business community could not function properly without consistency in financial reporting. The American Institute of Certified Public Accountants (AICPA) is a strong supporter of the FASB and many of our Certified Public Accountants (CPAs) are members of this prestigious organization. Accounting careers depend on your being a member. They are bound by the guidelines and principles they offer, as other countries also have similar councils that require a high level of accounting conduct.
The FASB created the code of basic accounting concepts known as General Accepted Accounting Principles (GAAP). The idea behind this is that if everyone uses the same business financial statement prepared in accordance with GAAP, then whoever ever uses the information can trust or rely on the information more consistently than if it were prepared differently. Any company that prepares their returns without using GAAP standards, as many small businesses do, cannot say that their returns are created under GAAP guidelines and must inform the user that they are not and let the buyer beware.
To keep an eye on everything, the government relies on the Securities and Exchange Commission (SEC) to keep an eye on the accounting world. They focus primarily on public companies because they are responsible for protecting investors from fraudulent misrepresentations. The SEC has established its own set of accounting standards and with the economy as it is today, they really are very busy with this.
Accountants are now more involved in preparing income tax returns and using their business financial statements. The Internal Revenue Service (IRS) can review those financial records when they conduct an audit and not following the rules can cause you big problems, risking fines and penalties.
As you can see, the principles and standards, in many ways, are a combination of voluntary and regulatory guidelines. There is a push to create an International Accounting Standards Board or (IASB) due to the increasing process of globalization. This will be a great company that will surely take years to build. Now that the stock markets around the world are in trouble, it is obviously necessary.