Additionally, with the different ways enterprises account for money and the distinctive business trustees, having these written standards makes all companies accountable. The four organizations that make up the hierarchy are the SEC, CPA, FAST, and the GABS. The SEC was formed to assist in establishing and assimilating financial information that is presented to stockholders. The CPA and FAST, who develops the standards for the private sector, are supported by the SEC. They believed that the private sector had the resources to fulfill this responsibility.
Even though the standards are written by the CPA and the FAST, the SEC may reject a standard or press the private sector into acting swiftly. To form a readership, all three work together. The Gasbag’s roll is the same as the Abs’s, only it is for state and government agencies. These entities must follow uniform procedures still. Users of financial statements need useful, relevant and reliable accounting information as well as the comparability and consistency of reported information. Therefore, principles and guidelines were developed called Conceptual Framework.
The framework is essentially a foundation for building a comprehensible and systematic set of standards for the accounting world. It is to be used as a reference for solving problems in reporting. When speaking of relevant information, it must be timely. It has to be available to decision makers before it loses its ability to influence them. The material should also have predictive value as to help in forecasting past, present and future outcomes. Feedback value is also essential and helps authenticate prior presumptions.
Reliability is another attribute necessary for acceptable accounting. This means it is verifiable, has truthful representation and is fundamentally error free. It is of great value since most users do not have the ability or the time to assess the content of the information. Outside auditors need to be able to reach the same ending result about a set of financial statements. If a company’s material can be comparable and consistent, it can be examined in contrast to another company’s at any given time, which is more practical and more beneficial to its users.
Businesses use two primary accounting methods, cash and accrual basis, to calculate taxable income for its federal taxes. A company can choose to compute the cash disbursements way or an accrual method. Under cash based accounting, a company will document revenue when cash is collected. They document an expense when cash is disbursed. Because it does not report revenue when earned and violates the revenue recognition principle, it is restricted under GAP.
The other is an accrual basis, which shows all expenses incurred and income earned for that particular time period. But, the expenses have not been paid or received in cash during that same cycle. The different types of business structures all have characteristics that define each one. A sole proprietorship is a business that is owned by an individual. It is simple to form, is owner controlled and has big tax advantages. The second is a partnership, which is owned by more than one individual identified as partners so they share control.
It is also easy to create. The third is a corporation, which is an independent legal entity separate from the people who own, control and manage it. And last is an LLC, a limited liability company. It resembles a Basic Accounting Concepts and Business Structures partnership but has limited liability protection that is comparable to a corporation. Because of these accounting concepts, structuring a business has become easier. One knows what to expect and chooses a business form that fits their needs.