Generally accepted accounting principles (GAAP) are the protocols used for the standardization and preparation of financial statements used in accounting reporting. Some of the financial statements subjected to GAAP include cash flow statements, financial statements and balance sheets. The principles are essential as they enhance the credibility of financial statements (FASB, 2008). The principles are essential because they facilitate promote the presence of a standard framework for operation of various business entities. The principles are administered and created by the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA). The sources of the accounting principles are presented through a hierarchy. The hierarchy is essential because it defines the distribution of authority among the agencies associated with GAAP. On top of the Hierarchy are the FASB statements. FASB technical bulletins are second in the hierarchy. Third on the hierarchy are the AICPA Executive Bulletins with clearance from the FASB. Fourth on the hierarchy are the guides of implementation that are published by FASB staff (FASB, 2008).
Useful accounting information must adhere to certain standards and qualities. Effective accounting information must be certified against the GAAP protocols after strict auditing for compliance with the required guidelines. The information must be relevant to exhibiting relevance through feedback value and being predictive. The audit report must portray the information to be worthy. Accounting information should be timely. The information must be available at the required time for the preparation of reports and other transactions (Morris, 2015). Therefore, for accounting information to be relevant, it should be presented within the specified timeline. Effective accounting information must exhibit reliability. This can be done through the presentation of information that can be verified through the appropriate authentication techniques. Reliable accounting information can assist in making decisions on a very high quality. Consistency is also a very important aspect of effective accounting information. For the information to be consistent, it should be comparable with related information (Morris, 2015).
The major difference between cash and accrual basis accounting is the time when expenses and revenue are acknowledged. In most cases, the cash basis is applied to personal expense management and small business entities. In the cash method, revenue accounts take place when the cash is received and for the expenditure the moment the money is released. The cash basis does not take into consideration the time when the invoices for the transactions were prepared (Stice, 2013). In Accrual Basis, revenues is accounted for at the time it is earned. The accounting for the services and goods also occurs at the moment of incurring of expenses and no cash payments have been made. Most of the business entities use accrual basis accounting in their operations because it provides a clear and accurate picture of a business entity.
There are different types of business structures that are defined by their unique structural and functional operation. These business structures vary in terms of tax and legal implications. A sole proprietorship has the simplest business structure. In this business, an individual owns a business entity and has full responsibility for all liabilities and assets. A limited liability business describes a business partnership with operational flexibility among the collaborating parties about the tax efficiencies and corporation. Cooperatives are business entities with an aim of serving a common interest of meeting the collective need of the members. The functional orientation of the business is to benefit every member of the cooperative. Corporation is complex and large business entities with a large number of employees (Micahel, 2007). Corporates are usually established, and they are operated on structured frameworks. Partnerships describe business entities where the members agree to be liable for all the business transactions and the level of responsibility for the members depends on the agreements.
- FASB, (2008). Financial Accounting Series. Financial Accounting Standards Board of the Financial Accounting Foundation. 302 (2008).
- Micahel, S. (2007). Business Structures. London: Entrepreneur Press.
- Morris, K., (2015). Qualities of Accounting Information. Demand Media Publication. 5(2015).
- Stice, E.J., (2013). Intermediate Accounting. Boston: Cengage Learning.