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Explaning Accounting Concepts and Business Structure

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Explaining Basic Accounting Concepts and Business Structures
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Dec, 5, 2011

Explaining Basic Accounting Concepts and Business Structures
The purpose of the paper is to explain basic accounting concepts and business structures. This paper covers four topics, which include the following: 1. Identify and describe the sources of generally accepted accounting principles (GAAP). 2. Describe effective accounting information using the qualities of accounting information. 3. Describe how an accrual-based accounting system is different from a cash-based of accounting 4. Describe the types of business structures and the defining features of each structure.
The Sources of Generally Accepted Accounting Principles
There are four categories in the house of GAAP, Category A through D. They are also in the order of the hierarchy. There are three major sources of GAAP in Category A. They are Financial Accounting Standards Board (FASB) Standards, Interpretations, and Staff Positions; Accounting Principles (APB) Opinions; and American Institute of Certified Public Accountants (AICPA) Accounting Research Bulletins. They are most authoritative pronouncements.
Category B includes FASB Technical Bulletins which is no longer issued, AICPA Industry Audit and Accounting Guides and AICPA Statements of Position. Category C has FASB Emerging Issues Task Force and AICPA AcSEC Practice Bulletins. Category D has the least authoritative pronouncements: AICPA Accounting interpretations, FASB Implementation Guides (Q and A), and Widely recognized and prevalent industry practices.
The hierarchy of GAAP is important “Because these professional bodies vote their issuance only after giving interested and affected parties the opportunity to react to exposure drafts and respond at public hearings” (Kieso, Weygandt & Warfiedld, 2007, p. 12).
Effective Accounting Information Using the Qualities of Accounting Information
Companies may provide useless accounting information regarding decision making, so “The FASB identified the qualitative characteristics of accounting information that distinguish better (more useful) information from inferior (less useful) information for decision-making purposes” (Kieso et al., 2007, p. 31). The qualities include user-specific qualities, primary qualities and secondary qualities.
User-specific quality is the understandability of information if it can help users see its significance. Primary qualities are relevance and reliability of the information. “To be relevant, accounting information must be capable of making a difference in a decision” (Kieso et al., 2007, p. 33). It should have predictive value, feedback value and timeliness. Reliability refers “to the extent that it is verifiable, is a faithful representation, and is reasonably free of error and bias” (Kieso et al., 2007, p. 33). Secondary qualities are comparability and consistency. Comparability of the information is to record it in similar way for different companies, so it informs similarities and differences of economic events. Consistency means to use the same accounting treatment for similar events over time. These qualities provide effective accounting information.
Accrual-Based Accounting V.S. Cash-Based Accounting Accrual-based accounting records financial events when it occurs and not when the cash is received or paid. On the other hand, cash-based accounting records revenue when cased is received and expense when cash is paid. Because cash-based accounting violates the revenue recognition principle and matching principle, it is generally prohibited.
The Types of Business Structures There are three primary entity forms of doing business, sole proprietorship, partnership and corporation. Sole proprietorship is one person owns the business. The benefit of it includes gives owner the control over business, simple to set up, and favorable tax treatment. The downside is that the owner is solely liable and may have less economic resources than partnership or corporation. Companies usually form partnership to gain financial support for starting or expending the business, so partners may bring unique skills and resources to the business. The partners share the control, liabilities and profit of the business.
Investors own corporation by buying stocks of the company. Benefit of corporation is easier to buy stocks, transfer ownership and raise funds than other form of business. On the contrary, tax treatments are not as favorable, but the owners do not have personal liability of the debts of the business.

Reference
Kieso, D. E., Weygandt, J.J., & Warfield, T. D. (2007). Intermediate accounting (12th ed.). Hoboken, NJ: Wiley.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2007). Financial accounting: Tools for business decision making (4th ed.). Hoboken, NJ: Wiley.

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