If you ever wanted to know what accounting is, this is your turn to learn? Who is in charge of setting the basic accounting standards that we all follow? Is there some kind of regulatory system in place to investigate and arrest people for accounting fraud? Well guess what, there is, at least to some degree, either way. So listening is a quick education in accounting principles that can explain everything.
First of all, what is accounting anyway? Well, in simple terms, accounting is the comprehensive system of gathering and recording a company’s financial information for the purpose of preparing summaries for the clearance of taxes, investors, managers, and other decision-makers within the companies or organizations in which that are involved. Accounting terminology or terms can be complicated at times and you may need to keep an accounting glossary handy that explains the terms in simple language if you are a beginner. To prevent people from committing ethical accounting fraud, leading experts in the United States created the Financial Accounting Standards Board, or FASB for short. This was established in 1973 and replaced the Accounting Principles Board (APB). The job of the (FASB) is to analyze and review the problems in the field that are presented to them. After much deliberation, they will evaluate what kind of action to take when an accounting problem occurs.
This was mainly voluntary and was very successful. Double-entry bookkeeping was founded in Italy in the 15th century, and the accounting formula has changed since then. The reason basic accounting concepts worked either was that the business community could not function properly if there was no consistency in financial reporting. The American Institute of Certified Public Accountants (AICPA) is a strong supporter of the FASB, and many of our Certified Public Accountants (CPAs) are members of this prestigious organization. Accounting careers are based on your membership. They are bound by the guidelines and principles they offer as other countries also have similar boards that require a high standard of accounting conduct.
The FASB created the code of basic accounting concepts known as Generally Accepted Accounting Principles (GAAP). The idea behind this is that if everyone uses the same business financial statement prepared in accordance with GAAP, then anyone who ever uses the information can rely on or depend on the information more consistently than if it were prepared differently. Any business that prepares their statements without using GAAP standards, as many small businesses do, cannot claim that their statements are created under GAAP guidelines and should inform the user that they are not and let the buyer beware.
To police everything, the government relies on the Securities and Exchange Commission (SEC) to police the world of accounting. They mainly focus on public companies because they are responsible for protecting investors from fraudulent misrepresentations. The SEC has established its own set of accounting standards and with the economy as it is today, they really are very busy with this.
Accountants are now more involved in preparing income tax returns and using their business financial statements. The Internal Revenue Service (IRS) can review those financial records when they do an audit, and not following the rules can get you into big trouble and risk fines and penalties.
As you can see, the principles and standards are in many ways a combination of voluntary and regulatory guidelines. There is a push to create an International Accounting Standards Board or (IASB) due to the increasing process of globalization. This is going to be a huge company that will surely take years to build. Now that stock markets around the world are in trouble, it’s obviously necessary.
