Financial Accounting Principles

Accountants follow professional guidelines for measurement and disclosure of financial information. These are called generally accepted accounting principles (GAAP). In the United States, the Financial Accounting Standards Board (FASB) formulates GAAP. The International Accounting Standards Board (IASB) sets global or International Financial Reporting Standards (IFRS), the two basic types of external providers of capital include investors (who exchange cash for stock) and creditors (who loan cash) to the entity to be useful, information must have the fundamental qualitative characteristics.
Those include:
• Relevance; and
• Faithful representation
To be relevant, information must be capable of making a difference to the decision maker, having predictive or confirming value. To faithfully represent, the information must be complete, neutral (free from bias), and without material error (accurate). Accounting information must focus on the economic substance of a transaction, event, or circumstance, which may or may not always be the same as its legal form. Faithful representation makes the information reliable to users. Accounting information must also have a number of enhancing qualitative characteristics. These include
• Comparability;
• Verifiability;
• Timeliness; and
• Understandability.
Comparability means that the accounting information for a company must be pre-pared in such a way as to be capable of being both compared with information from other companies in the same period, and consistent with similar information for that company in previous periods.
Verifiability means that the information must be capable of being checked for accuracy, completeness, and reliability. The process of verify-ing information is often done by internal as well as external auditors. Verifiability enhances the reliability of information, and thus makes the information more representative of economic reality. Timeliness means that the information must be made available to