The Financial Accounting Standards Board, or FASB, is in charge of accounting and budget guidelines for private-sector businesses in the U.S. Although its full set of standards is much more detailed and comprehensive, ten rules set the standard for all accounting practices that fall under the FASB’s purview.
The FASB is a nongovernmental and independent entity that sets standards for generally accepted accounting practices (GAAP) for private-sector businesses. Seven individuals are appointed by the organization’s Board of Trustees for a five-year term to form the FASB. Each member may serve up to two terms, and the entire FASB has a research team in excess of 60 people to assist it. The Securities and Exchange Commission oversees the FASB.
Any company that publicly distributes its financial statements is required to abide by the GAAP for all accounting and budget guidelines regarding reporting. Governmental agencies have a parallel agency that sets their standards, called the Governmental Accounting Standards Board. It is an entity that is separate from the FASB. Both entities provide comparable standards and oversight to their respective sectors.
The GAAP rests on ten accounting principles, the first three of which are listed as assumptions. The Economic Entity Assumption differentiates between the accounts of an individual and his business -- even if that business is a sole proprietorship, and therefore considered the same as the business owner for legal purposes. The Monetary Unit Assumption stipulates that accounts are written in U.S. dollars, and also that adjustments are not made for inflation. The Time Period Assumption states that account statements must always list the opening and closing dates of coverage, and that accounts for any time period can be estimated with reasonable accuracy -- even if that time period is as short as a week.
The next five GAAP basic accounting principles include the Cost Principle, which states that costs for items are recorded as actual costs at the time of purchase, without adjustment for inflation. Next is the Full Disclosure Principle, which prompts accountants to include any information regarding anything that may affect the financial health of a business in footnotes to their reports. The Going Concern Principle assumes that a business is financially healthy enough to survive until the next accounting period -- and states that an accountant must say if this is not the case. The Matching Principle states that amounts entered as Expenses must match with amounts earned as Revenues -- basically, books must be balanced, and the accrual accounting method must be used. The Revenue Recognition Principle recognizes that since the accrual accounting method is being used, revenue is written down when it is earned -- which is often before it is actually received.
Additional GAAP Guidelines
The final two GAAP basic principles are Materiality and Conservatism. Materiality allows accountants to overrule the previous guidelines in the case of inconsequential amounts; basically, amounts can be rounded up or down instead of matching to the exact penny. The principle of Conservatism states that accountants should always fully disclose any losses, but should use whichever acceptable reporting method shows a lesser net income or assets for the business.
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