Accounting Theories

According to Michael Dennis and Steven Kozack in Credit and Collection Manager's Manual, the following comprise some of the most important basic accounting theories, assumptions and principles.

The Business Entity: A corporation is a business entity separate and distinct from its owners.

The Going Concern Concept: Financial statements are prepared based on an assumption that the company is a "going concern" meaning it is likely to remain in business. If a CPA has questions about the viability of the company under audit, that information will be reflected in its auditor's opinion letter.

Historical Cost Basis: Most non current assets are recorded at their historical cost less accumulated depreciation. As a result, the value of an asset recorded on the balance sheet may have little in common with the market value of that asset.

Conservatism Principle: This principle states that given a choice of reporting options, a CPA must select the accounting method that has the least favorable impact on the net income, or the asset value of the company being audited.

The Matching Principle states that a company must determine revenue, and match the appropriate costs or expenses against that revenue. The goal of the matching principle is to make certain companies do not overstate profits by recording sales revenues but failing to record the expenses associated with generating the sales and recording the revenue.

Full Disclosure Requirement: A requirement that a publicly traded co

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ciples referred to by the acronym GAAP. Independent Certified Public Accountants (CPAs) follow GAAP rules when auditing a client company's books and records and before issuing an opinion about the accuracy of the financial statements. Dennis adds that the U.S. Securities and Exchange Commission (SEC) administers the Securities Act of 1933, the Securities Exchange Act of 1934, and other legislation concerning the sale and trade of stocks and bonds. The primary mission of the SEC is to protect investors and maintain the integrity of the securities markets. SEC rules require that all investors have access to certain basic facts about a potential or current investment. For example, the SEC requires public companies to provide a detailed report on their financial condition once a quarter. The SEC also requires publicly traded companies to report "material events" promptly - meaning in a matter of days rather than weeks. This mandatory disclosure of information provides a common pool of knowledge for all investors and potential investors to use to judge if a company's stocks and bonds may be a good investment. The SEC has the legal authority granted by the United States Congress to create rules governing the manner in which publicl

Category: Business - A