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Acc 501 Generally Accepted Accounting Principles

2715 words - 11 pages

There is a multitude of useful and important terms in the profession of accounting. Many of these help us to understand and identify certain aspects, items and methods inherent to the practice of accounting's nature and utility. In the first part of module 1's case assignment, we will address a few of the important terms that are detrimental to the knowledge of this system. In this module we will define, expand upon and explain the importance to financial statements for the following terms; GAAP or generally accepted accounting principles, historical cost, accrual and cash basis accounting, and current and non-current assets and liabilities.Generally Accepted Accounting PrinciplesBarron's Dictionary of Business Terms defines the generally accepted accounting rules (GAAP) as "conventions, rules, and procedures that define accepted accounting practice, including broad guidelines as well as detailed procedures".Essentially these guidelines are established and interpreted by the Financial Accounting Standards Board (FASB) to create a somewhat uniform standard, in this case rules and procedures, for all business entities to abide by in relation to their public accounting activities. These GAAP rules set standards in order to ensure the level practice of accounting in the preparation and presentation of financial reports for all companies (Silbiger, 1993).This is extremely important to the financial statement for a number of reasons. However, the most important and most relevant relation that GAAP rules create to the financial statement deal with uniformity and the "level" playing field they create. By creating a set of standards for which all companies must adhere to, the GAAP rules create the environment in which the financial reports of all companies can be compared to each other on an equal basis (Silbiger, 1993). This can also allow investors and creditors to gauge the earnings capacity and financial strength of a business (http://www.jmrose.com/body_reading_financial_statements.html). The ability to compare financial reports with one and other in such an equal manner also aids greatly in the business decision making process.Historical CostHistorical cost is an "accounting principle requiring assets to be based on original cost…" (Friedman, 2000).Historical cost is an aspect of accounting conservatism. This principle utilizes the theory that until a gain is realized it can not be recognized (Silbiger, 1993). In essence, historical cost means that any asset purchased by a business will be valued on the balance sheet at the cost for which it was purchased regardless of its current market value. This principle of historical cost is juxtaposed to current market value. Because an asset's current market value is ignored in financial reports, those meant for external purposes at least, the use of historical cost can be misleading in regards to an item's true value or the businesses' overall financial position.Understanding historical cost is...

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