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Accounting for Non-Accounting Majors

1. Explain what is meant by Generally Accepted Accounting Principles (GAAP).
2. What is the FASB, and what does this organization do?
3. What is the SEC, and what does this organization do?
4. In light of the ongoing economic crisis, do you think these organizations are doing a good job? Why or why not?

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1. Explain what is meant by Generally Accepted Accounting Principles (GAAP).

GAAP (Generally Accepted Accounting Principles) refers to the standard framework of guidelines for financial accounting used in any given jurisdiction. It includes the standards, conventions and rules accountants must follow in recording and summarizing transactions in the preparation of financial statement likes the income statement, balance sheet, etc.

The principles are as follows:
1. Regularity: Regularity can be defined as conformity to enforced rules and laws.
2. Consistency: The consistency principle requires accountants to apply the same methods and procedures from period to period.
3. Sincerity: According to this principle, the accounting unit should reflect in good faith the reality of the company's financial status.
4. Permanence of methods: This principle aims at allowing the coherence and comparison of the financial information published by the company.
5. Non-compensation: One should show the full details of the financial information and not seek to compensate a debt with an asset, a revenue with an expense, etc.
6. Prudence: This principle aims at showing the reality "as is" : One should not try to make things look prettier than they are. Typically, a revenue should be recorded only when it is certain and a provision should be entered for an expense which is probable.
7. Continuity: When stating financial information, one should assume that the business will not be interrupted. This principle mitigates the principle of prudence: Assets do not have to be accounted at their disposable value, but it is accepted that they are at their historical value.
8. Periodicity: Each accounting entry should be allocated to a given period, and split accordingly if it covers several periods. If a client ...

Solution Summary

The generally accepted accounting principles are explained in the solution.